ASX buy now, pay later (BNPL) shares including Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) are sinking this morning after US authorities launched an investigation into the sector.
The United States-based Consumer Financial Protection Bureau (CFPB) issued orders to 5 BNPL companies.
The bureau is undertaking the probe to see if BNPL players need to be better regulated and if US consumers are adequately protected.
At the time of writing, the Afterpay share price has plummeted 7.44% to $82.84, while Zip shares are trading 6.97% lower at $4.14.
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ASX BNPL shares caught up in consumer probe
The 5 companies targeted in the probe include Afterpay, Zip, Affirm Holdings Inc (NASDAQ: AFRM), Paypal Holdings Inc (NASDAQ: PYPL) and Swedish fintech Klarna.
US investors responded swiftly to the news with Affirm shares crashing by 10.6%, while the Paypay share price lost 1%. It is likely that Paypay is better insulated as BNPL is not its main business.
In its release, the CFPB highlighted concerns over "accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology".
CFPB director Rohit Chopra said:
Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too.
We have ordered Affirm, Afterpay, Klarna, PayPal, and Zip to submit information so that we can report to the public about industry practices and risks.
Areas of concern
The watchdog is specifically concerned about three areas, including accumulation of debt. Unlike layaway (called layby here) that are typically used for the occasional big purchases, it believes BNPL can quickly become a regulator habit for consumers making smaller but more frequent purchases.
CFPB is concerned that BNPL users can quickly lose track of payments and their growing debt. Consumers can be hit with big fees for missing payments.
Further, as BNPL "credit" is relatively easily given, consumers could end up spending more than they intended.
Are better regulations needed internationally?
The other issue of concern is regulatory arbitrage where BNPL companies may not be following consumer protection laws. For instance, some BNPL products do not provide certain regulatory disclosures.
Also, BNPL applicants do not get the same protections compared to if they were applying for a credit card, even though the application process may look similar.
Afterpay and Zip shares facing more volatility
Finally, there's the issue of data harvesting. BNPL operators have access to valuable customer data, such as payment histories.
CFPB wants to understand how BNPL companies are using the data. Some companies may be using it for behavioural targeting and data monetisation. This is similar to criticisms levelled against Amazon.com, Inc (NASDAQ: AMZN).
Having said that, the US probe shouldn't come as too big a surprise to investors. Afterpay, Zip and other BNPL players in Australia have also been subject to similar investigations.
CFPB said it was working with its international partners in Australia, Sweden, Germany and the United Kingdom.
