Connecticut AG targets PayPal, Sezzle and other BNPL lenders

Back in June, Morgan Stanley cautioned about the growing popularity of Buy Now, Pay Later (BNPL) loans, but without deeming the service a significant threat to consumers.

Morgan Stanley noted that BNPL represents a small portion of e-commerce sales, although it is growing rapidly. Having financed 2% of e-commerce sales in 2020, BNPL loans grew to 6% of that total by 2024.

This growth "is raising concerns among investors about distortions in credit reporting and consumers’ ability to pay other debt," according to the firm.

“As consumers use BNPL more frequently and for more reasons, we think it is worth keeping an eye on it,” Carolyn Campbell, Morgan Stanley’s asset-backed securities strategist, said in a statement. “However, data suggest that the level of debt taken on through BNPL, as well as delinquency and default rates, are still very low compared to other types of consumer debt.”

A Morgan Stanley AlphaWise survey found that BNPL is especially gaining traction among younger consumers, with the adoption highest among those between the ages of 16 and 24 (41%) and 25 and 34 (39%).

And though Morgan Stanley does not yet see a significant problem being caused by the BNPL market, several state governments in the US are growing concerned about its usage.

William Tong, attorney general for Connecticut, said on Monday that he is leading a coalition of attorneys general from six other states in an inquiry into the business practices of several BNPL lenders. As part of the probe, letters were sent to the six biggest BNPL service providers, including PayPal Holdings (PYPL), Sezzle Inc. (SEZL), Affirm Holdings (AFRM) and Klarna Group (KLAR).

The attorneys general are seeking detailed information on pricing and repayment structures, consumer contracts, user agreements, and disclosures.

Letters were also sent to AfterPay and Zip.

Trump has rolled back consumer protections

Tong noted that the action was being taken after the Consumer Financial Protection Bureau announced in May that it would no longer be prioritizing enforcement actions on BNPL lenders, part of a rollback of consumer protections that has happened under the Trump administration. The Biden administration had made BNPL enforcement one of its priorities.

“Buy now, pay later may appear to be a convenient way to afford a purchase, especially now during the holiday season, but shoppers need to watch out for debt traps," Tong said in a statement. "We’re asking the six largest buy-now-pay-later lenders for detailed information on their costs and fees, their disclosures, how they vet their customers’ abilities to pay, among other questions."

Tong was part of a coalition of attorneys general that called on federal regulation of the BNPL industry back in 2022, raising concerns that the "structure of quick credit application approvals and convenient, flexible payment schedules" made it especially appealing to "borrowers already struggling with debt or younger borrowers who lack experience with credit."

"As Trump rescinds critical protections for buy-now-pay-later consumers, it’s up to states now to ensure shoppers know what they are getting into, and to ensure these companies are held accountable,” Tong said.

The Financial Times reported in May on Klarna's widening losses due to a growing number of consumers failing to repay their loans.

In fact, the Federal Reserve released a report last year that found "adults who report lower overall financial well-being and those who appear liquidity or credit constrained were not only among the most likely to use BNPL, but most of these consumers also indicated that they used BNPL because it was the only way they could afford to make the purchase."

"Buy now, pay later programs are a scam," Douglas A. Boneparth, president of Bone Fide Wealth, said in a post on LinkedIn earlier this year. "They encourage overspending, destroy credit, saddle you in debt, and target consumers who are most susceptible to borrowing when they shouldn’t. Society would be better off without them."

Klarna's stock dropped 4.5% on Monday, Affirm's fell 2.7% and Sezzle's dipped 1.9%. PayPal's shares stayed mostly flat.