On Wednesday, analysts from TD Cowen addressed the potential financial impact on Block, Inc. (NYSE: SQ) and PayPal (NASDAQ:PYPL) Holdings, Inc. (NASDAQ: PYPL) following a new interpretive rule from the Consumer Financial Protection Bureau (CFPB). The rule proposes to classify Buy Now, Pay Later (BNPL) products as credit cards, bringing them under the purview of certain provisions of the Truth in Lending Act (TILA).
The focus of the CFPB's interpretive rule is on the consumer protection aspects such as dispute resolution, refund requirements, and statement disclosures. Notably, the rule will not subject BNPL providers to "Ability (OTC:ABILF) to Repay" rules, which are more stringent credit assessments.
TD Cowen highlighted that the BNPL industry might contest the rule if it leads to retroactive lawsuits over dispute resolutions. Still, the anticipated costs for Block and PayPal are expected to be minimal.
TD Cowen suggests that the ruling may present a slight headwind for Block and PayPal, as the companies might need to enhance their disclosure and billing dispute processes. Nonetheless, the analysts believe that both companies were likely already complying with similar standards, given their interest in properly managing disputes.
The ruling is seen as relatively favorable for BNPL providers since it does not impose the "Ability to Repay" requirements. According to TD Cowen, the benefits of this exclusion outweigh the potential costs associated with meeting the new dispute, refund, and settlement requirements.
The analysts further speculate that the largest BNPL providers, such as Block's Afterpay and PayPal's Pay Later service, are probably already incurring most of the costs that the new rule would mandate.
InvestingPro Insights
As Block, Inc. (NYSE: SQ) navigates the evolving regulatory landscape of the BNPL sector, investors are closely monitoring the company's financial health and market position. According to InvestingPro data, Block's market cap stands at a robust $42.26 billion, with a forward-looking P/E ratio of 82.87, indicating investor confidence in its future earnings potential.
Notably, the company's revenue growth over the last twelve months has been impressive at 23.28%, reflecting its strong operational performance amidst a dynamic market environment.
Two key InvestingPro Tips highlight that Block is expected to see net income growth this year and that 25 analysts have revised their earnings estimates upwards for the upcoming period, signaling potential optimism in its financial outlook.
With a PEG Ratio of just 0.45, Block is trading at a low price relative to its near-term earnings growth, suggesting that the stock could be undervalued given its growth prospects. Moreover, while the stock has experienced volatility, with a 17.96% one-year price total return, it showcases the potential for high returns over time.
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