It hasn't been a great day for companies in the buy now, pay later (BNPL) sector. The Afterpay Ltd (ASX: APT) share price fell into the red, as did shares in fellow payment providers Zip Co Ltd (ASX: Z1P) and EML Payments Ltd (ASX: EML).
Comparatively, the S&P/ASX 200 Index (ASX: XJO) closed 0.6% up. So why did the share prices of these 3 BNPL companies drop today?
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ASIC continues BNPL probe
The BNPL industry is on the Australian Securities and Investments Commission's (ASIC) radar.
According to the Australian Financial Review, ASIC is concerned that consumers are not clear on how the BNPL businesses operate.
ASIC believes that while the payment services that companies like Afterpay, EML Payments and Zip offer are convenient, some consumers are not aware of how the transactions are actually structured.
Specifically, ASIC is now probing into whether the BNPL companies meet the regulator's new design and distribution obligations (DDO). The DDO has to do with how a business defines its consumers, how it determines the services required and how the product is delivered.
Afterpay share price sinks 4.5% as BNPLs slide
The Afterpay share price closed down 4.5% today, trading at $108.28 a share. The Zip share price lost 1.1%, and the EML Payments share price dropped 0.97%.
ASIC has voiced its concern that the BNPL industry has grown far too quickly without being regulated. Its new regulations are scheduled to be enforced come October.
The general idea of enforcing the new BNPL rules is consumer protection. The DDO will also apply to other sectors and industries. However, BNPL is the first target set to try the new regulation out on.
Foolish takeaway
All businesses have an obligation to be transparent and not pull the wool over the eyes of consumers.
The BNPL companies were bound to hit a regulation hurdle sooner or later, and being selected to test drive the DDO framework can potentially send a strong regulatory message from a fairly new space.
Investors will undoubtedly be interested in discovering what the DDO rules will mean for ASX BNPL companies and others once enforced.
