Why are the Afterpay (APT) and Zip Co share prices sliding?

Posted: 17 December 2021 12:16 pm
News
Afterpay-shares-17Dec_1800x1000_Finder

Shares in the 2 Australian BNPL leaders are down 15-20% in the last 12 months, with today's news not helping its share price.

Buy now pay later operators Afterpay (ASX: APT) and Zip Co Ltd (ASX: Z1P) are among the worst performers on the ASX in early trading on Friday.

At the time of writing, Afterpay shares tumbled 8.4% to $82, while Zip Co had slid 8.1% to $4.09.

Why are the Afterpay and Zip stock prices losing ground?

Investors in Afterpay and Zip have turned jittery after both Australian fintech firms were listed among the 5 BNPL businesses facing increased scrutiny as part of a new inquiry by the US financial regulator.

Overnight, the US Consumer Financial Protection Bureau (CFPB) asked the 5 companies – PayPal, Klarna, Affirm as well as Afterpay and Zip – to provide information on their business practices, amid concerns that their financing products are putting consumers at risk.

"The CFPB is concerned about accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology," the regulator said in a statement.

"As part of today’s inquiry, the Bureau is working with its international partners in Australia, Sweden, Germany and the UK, specifically the Financial Conduct Authority.

"The Bureau will also be coordinating with the rest of the Federal Reserve System, as well as its state partners," it added.

Regulatory risks

Buy now pay later services allow customers to split payments into mostly interest-free instalments, with a down payment at checkout.

Its use has spiked over the last 2 years as online sales have surged during the pandemic, prompting major players including global financial giant PayPal, tech leader Apple and Australia’s top lender CBA to enter the rapidly growing industry.

Earlier this year, digital payments giant Square (NYSE: SQ) agreed to takeover Afterpay in a US$29 billion (AUD$39 billion) deal.

That has also raised concerns among financial regulators, especially amid rising reports about rising fraudulent activity and growing bad debts.

"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," CFPB director Rohit Chopra said, justifying the agency’s enhanced scrutiny of industry practices and risks.

That could moderate the sky-high growth rates enjoyed by most of the BNPL operators, especially in the world’s biggest retail market, the US. Most of the named companies have said they support the CFPB review.

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