Posted on 20 Dec. 2021 at 11:52
The threats are becoming clearer, in the United States, on the installment payment. The Consumer Financial Protection Bureau (CFPB) announced a few days ago that it was launching an investigation into several companies specializing in this popular practice. Paypal, Affirm and Afterpay are particularly concerned, while the federal agency is also awaiting responses from the Swedish start-up Klarna, recently established across the Atlantic, and Zip.
“The split payment is the new version of the layaway (ease of payment, editor’s note), but with a more modern and fast touch, where the consumer gets the product immediately but also inherits a debt immediately,” said in a statement on CFPB director, Rohit Chopra. Companies have been asked to clarify their practices, so that consumers are fully informed of the risks they run.
Heavy consequences
With the “buy now pay later” (BNPL), the consumer can pay online in several installments, sometimes with additional costs. Several companies have made it a specialty, offering this functionality to online merchants. The practice has exploded since the start of the pandemic, at the same time as e-commerce has taken off. During the week of Black Friday, at the end of November, sales in “BNPL” have further increased by 29% in one year, according to data from Salesforce.
But fans of split payment are not always aware that it is a form of debt and that delinquencies can have serious consequences, especially on their “credit score”. This is calculated by rating agencies and determines the ability to borrow from a bank.
No visibility for banks
“If you are late on a payment and the split payment company reports your delay to a credit assessment company, it can harm your credit history,” the CFPB recalled this summer in a report, which drew already the alarm bells, while 40% of Americans have already resorted to this practice since the beginning of the crisis. According to the “Wall Street Journal”, the rating agency Equifax has also planned to integrate into its analysis the split payments from next year.
The CFPB investigation could mark a turning point for the sector. As soon as the investigations were announced, the securities of the main market players fell on the stock market: Affirm lost 11%, its Australian competitor Afterpay fell by 8% … Investors had already expressed their fears on the model of these companies and the losses they generate.
Some also point out the importance of the subject for the banks, which have no visibility on these files. “Banks could underestimate the level of indebtedness of an individual when taking out new debt”, recently estimated Fitch analysts. The threat of regulation is taken very seriously in the United States, while the CFPB, weakened under the Trump administration, is strengthened under Joe Biden.
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