“Purchase Now, Pay Later” shares plunge after the US client watchdog opens an investigation

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An Afterpay logo is displayed on a smartphone.

Igor Golovniov | SOPA pictures | LightRakete | Getty Images

The stocks of several “buy now, pay later” firms fell sharply after the US consumer watchdog opened an investigation into the sector.

The Consumer Financial Protection Bureau said Thursday it was looking for information from Affirm, Afterpay, Klarna, PayPal and Zip about the risks and benefits of their products.

BNPL services allow buyers to defer payment for items, usually over a period of monthly installments and without interest – although some charge heavy fees for late payments.

The CFPB said it was particularly concerned about the ability for consumers to accumulate debt quickly through BNPL plans, as well as the lack of adequate regulatory disclosures and data collection.

Several BNPL companies saw their share price plunge after the announcement. US-based Affirm stocks closed 11% on Thursday while Australian companies Afterpay, Zip and Sezzle fell 8%, 6% and 10% respectively on Friday.

Investors flocked to BNPL stocks last year after the growth of the sector was boosted by the coronavirus pandemic.

A shift in consumer habits towards e-commerce and flexible credit, coupled with huge government stimulus packages, has benefited companies like Klarna, Affirm, and Afterpay greatly.

This, in turn, has led big tech companies like PayPal and Block to step into BNPL in hopes of capitalizing on the growth of the industry.

PayPal launched its own BNPL offering late last year, while Block, formerly known as Square, recently announced a $ 29 billion deal to acquire Afterpay.

But in 2021 the tide turned. Afterpay stocks have plummeted over 30% since the start of the year, while Zip is down 25%. Sezzle’s share price has more than halved since the beginning of the year. Affirm, which debuted earlier this year, is one of the few BNPL firms still in the green.

Market participants are alarmed by the rising losses suffered by companies in the sector.

Zip’s pre-tax loss rose to A $ 724 million ($ 518 million) in fiscal 2021, up from A $ 20.6 million a year earlier. Afterpay lost A $ 194 million for the full year, compared to A $ 26.8 million in 2020.

Meanwhile, analysts have warned that regulation could be a significant headwind for the room going forward. Christopher Brendler, an analyst at DA Davidson, told CNBC in September that a regulatory response “could slow the growth of the BNPL sector”.

In the UK, the government plans to regulate BNPL. Companies in the emerging industry would come under the supervision of the Financial Conduct Authority, which regulates financial services companies in the country.

The UK Treasury Department is consulting with BNPL firms and other stakeholders to support its plans. The consultation ends on January 6, 2022.

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