Buy now, pay later stocks fall after U.S. consumer watchdog launches probe

Yahoo Finance's Brian Cheung joins the Live show to weigh in on the consumer watchdog probe into buy now, pay later companies' business models, their use of personal data, and the ethics of allowing buyers to take on large amounts of debt.

Video transcript

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BRIAN SOZZI: The Consumer Financial Protection Bureau said it's demanding information from the likes of a firm PayPal and Afterpay because it's concerned that borrowers are accumulating debt, the companies may be engaging in regulatory arbitrage, and the personal data of consumers could be misused. Yahoo Finance's, Brian Cheung, is here with more on this. Brian.

BRIAN CHEUNG: Hey, Brian. Well, obviously, the buy now pay later craze has really come in to the scrutiny of regulators. And at least one regulator is now moving to act, the Consumer Financial Protection Bureau where Rohit Chopra, who has only been in the role for a few months now is moving very quickly. Now wants to ask five companies for more information about the buy now, pay later model. The five targeted companies are Affirm, Afterpay, Klarna, PayPal, and Zip, the CFPB says it has concerns about the ways in which users of buy now, pay later products can accumulate debt, whether or not there is regulatory arbitrage because these are not banks that are regulated outside of the banking industry.

And then, also how they use the data on users whenever they use buy now, pay later to buy a mattress or sneakers, perhaps, and the like. Now, we're starting to hear from some companies regarding their angle of things. We heard from a firm in a statement earlier today. They said, quote, "We welcome the CFPB's review and support regulatory efforts that benefit consumers and promote transparency within our industries," adding that they, "Will continue to engage with all of our stakeholders, including regulators to support efforts that advance our mission."

We also heard from PayPal, which by the way, is also a big company that has Venmo as well, although the buy now, pay later product is really more intertwined with PayPal. In a statement that company said, quote, "PayPal is reviewing the letter and we will continue to work productively with the CFPB to provide information as requested."

And you guys will recall that we did actually speak with Max Levchin over Affirm in late October. I had asked him directly about the possibility of the CFPB getting involved. As a reminder, he actually served three years on the board of the CFPB, so he is very close with the regulators and said that he's open to working with them as this technology continues to get further adoption.

What is interesting in a little bit of a twist here, I want to add, is the banking industry's view of all of this, we actually got a statement from the Consumer Bankers Association where they said they were encouraged by the CFPB taking this move. They welcomed the efforts because they want to make sure that there is a level playing field. Again, those five companies that I listed earlier are not banks, so they're not regulated by the same entities that usually regulate your local national banks, as you would see.

So that is indeed a very interesting twist here, that the banking industry wants the CFPB to crack down on these industries. Definitely a very interesting dynamic that will be interesting to watch play out in the coming years, guys.

BRIAN SOZZI: And, Brian, these stocks outside of PayPal, but really Affirm has really captivated the minds of traders this year. But let's be clear, it's going to take, I would say, a while, right, before any potential changes come through?

BRIAN CHEUNG: Yeah. Well, certainly. I mean, for what it's worth, this inquiry from the CFPB is just that, it's an inquiry. This is not rulemaking, this is not clamping down on the business models or outlawing them in any way, this is just a KFCB reaching out to these companies asking for a little bit more information about the pros and also the cons associated with this type of product. And also probably trying to find out under the hood just how lucrative it is for these companies.

Now, again, the reason why the CFPB is doing this is because they're the ones that have the purview over non-bank financial companies. This is an organization, or rather a government Bureau that was formed after the financial crisis as the brainchild of Elizabeth Warren. And that's why it's been a little bit politically charged and the reason why it's actually created a bit of a stir among those on Capitol Hill regarding the authority that they have to do things like this.

But aside from all of that, the CFPB here is just trying to say, hey, we want to talk to you guys a little bit more, get a little bit more information about exactly how this industry works. And then, that could be a jumping pad for them to eventually create some rule makings or guardrails around the industry.

What might that look like? It's hard to say, but it could be in the form of can't charge certain types of interest rates above a certain level or some sort of cap on the amount of installation payments that you could break up each of these buy now, pay later purchases into. So, again, I'm just kind of throwing things at the wall here, but you can imagine that the CFPB might be using this as the first step towards regulation. But as we all know, as is the case in DC, those things take a very, very long time.

BRIAN SOZZI: So very true. Brian Cheung, thanks so much.