The buy now, pay later (BNPL) sector continues to face significant scrutiny from the financial media due to the allegedly predatory nature of the services offered by companies like Affirm Holdings (NASDAQ:AFRM). A recent news piece from Fast Company highlights the possible risks of owning AFRM stock.
In much the same way payday lenders went under the regulatory microscope in years past, there is no question that the BNPL industry will face the wrath of financial regulators sooner rather than later.
So, investors ought to ask themselves whether AFRM is trading a little over $30 because investors have baked in the troubles brewing. Or is there more to come?
I think there’s more to come.
AFRM Stock Down 68% Since First Day Close
If you bought shares in its January 2021 initial public offering (IPO), and you still hold them, you’re only down 37%. If you purchased at the end of the first day of trading, you’re down 68%, and if you bought at its all-time high of $176.65 on Nov. 8, 2021, you’re down a whopping 83%. Ouch!
As I said in the intro, I don’t think it’s news that these services can be addictive to consumers, especially those who aren’t good at budgeting and keeping track of their spending.
In March, I recommended investors thinking of riding the BNPL wave stick with Block (NYSE:SQ), which owns Afterpay, the second-largest BNPL provider behind Affirm and privately-owned Klarna. The rationale is that Block has a diversified group of revenue streams that should insulate it from any regulatory clampdown that happens in the future.
After reading the Fast Company piece, I’m glad I did. In my opinion, the BNPL industry is predatory, making it vulnerable to greater financial oversight.
The Bottom Line
The Fast Company story in question had this to say about buy now, pay later, and the late fees and charges associated with these services:
Consumer advocate groups are urging regulators to step in, particularly the Consumer Financial Protection Bureau. ‘There needs to be oversight, just like there is in every financial product,’ Fast Company reported Rachel Gittleman, financial services manager at the Consumer Federation of America said. When reached for comment, a spokesperson for the CFPB said, ‘We can’t comment on whether we intend to regulate BNPL [buy now, pay later] at this time.’
Despite the need for payday lending reforms, few states have created reforms with bite. A total 0f 32 states still have payday lenders, with only 18, including the District of Columbia, prohibiting payday lending or requiring caps on the interest rate charged that essentially accomplishes the same thing.
If you’re an aggressive investor, a bet on AFRM at this point could pay off because the history of payday lending suggests the federal government won’t clamp down on BNPL practices.
I wouldn’t buy AFRM, but that doesn’t mean you shouldn’t.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.