BNPL Stocks Hit as 7 States Launch Probe Into Lending Practices
Affirm and PayPal targeted in an inquiry focused on consumer protection, hidden fees, and the risk of 'debt traps' as regulatory pressure intensifies.
The 'Buy Now, Pay Later' (BNPL) industry is facing a new wave of regulatory pressure as a coalition of seven state attorneys general launched a coordinated inquiry into the sector's lending practices, sending a chill through the stocks of its leading players.
Shares of Affirm (AFRM), a bellwether for the BNPL market, fell nearly 2% in Tuesday trading following the announcement. PayPal (PYPL), which offers a similar installment payment service, saw its shares trade flat. The market's reaction highlights investor concern over potential new compliance costs and stricter rules for a sector that has grown rapidly with minimal oversight.
The investigation, led by Connecticut Attorney General William Tong, targets major BNPL providers, including Affirm and PayPal. It seeks detailed information on their fee structures, disclosure policies, and underwriting standards. The participating states are Connecticut, California, Colorado, Illinois, Minnesota, North Carolina, and Wisconsin.
"Buy now, pay later may appear to be a convenient way to afford a purchase... but shoppers need to watch out for debt traps," said Attorney General Tong in a press release. He noted that as federal bodies rescind some protections, "it's up to states now to ensure shoppers know what they are getting into, and to ensure these companies are held accountable."
This state-level action comes amid a complex and shifting regulatory landscape for the fintech sector. While a Consumer Financial Protection Bureau (CFPB) rule to classify some BNPL products as credit cards was recently rescinded, international regulators are moving in the opposite direction. Both the United Kingdom and the European Union are advancing legislation to bring BNPL providers under the authority of financial regulators, requiring more stringent affordability checks and clearer terms, according to industry analysis.
The inquiry focuses on whether the popular point-of-sale loans are placing consumers at undue financial risk. Regulators are examining unclear terms, the potential for hidden fees, and whether the ease of access encourages consumers to accumulate unsustainable debt. The probe will also scrutinize how companies assess a borrower's ability to repay, their policies on late fees, and the handling of disputed charges.
BNPL services exploded in popularity as a modern alternative to traditional credit cards, offering consumers a simple way to split purchases into smaller, interest-free installments. For merchants, they have proven to be a powerful tool for increasing sales and customer conversion rates.
However, consumer advocacy groups have long warned that the model can obscure the true cost of a purchase and make it easy to overspend. The lack of robust underwriting, a key feature that makes the services quick and convenient, is also a primary concern for the attorneys general, who worry it may appeal to borrowers already struggling with debt.
The outcome of this multi-state inquiry could lead to significant changes for the industry, potentially including new state-level regulations on fee transparency, marketing, and lending standards. For investors, the probe introduces a new layer of uncertainty for a sector already grappling with questions about its long-term profitability and its performance in a shifting economic environment.