(Bloomberg) -- A top US financial regulator is warning banks about potential risks in offering buy-now, pay-later products that have surged in popularity with consumers.

Traditional lenders are joining firms like Affirm Holdings Inc., Klarna Bank AB and Afterpay Ltd. in giving customers shorter-term borrowing options. Despite their surging popularity, the arrangements can pose major challenges for big banks, according to the Office of the Comptroller of the Currency. 

Read More: U.S. Bancorp Plans to Offer a Buy-Now, Pay-Later Option

The OCC, part of the Treasury Department, said Tuesday the products present credit, compliance and reputation challenges for the banks. Lenders should ensure that marketing materials are clear, the regulator said. 

The warnings follow similar assessments by the Consumer Financial Protection Bureau and possible new government regulations. Meanwhile, buy-now, pay-later offerings helped fuel a record start to the holiday shopping season in the US, according to Adobe Inc.   

“We think this is well-timed to say, ‘Hey, banks, if you get into this, this is how to do it responsibly,’” Michael Hsu, the acting comptroller of the currency, said in an interview.

Hsu added that if consumers aren’t careful with the products they can get overextended and that can lead to loan delinquencies. He said that even if the loans don’t have any finance charges, they can spur charges like overdrafts or late fees when they’re linked to credit or debit cards. “That’s where the risks are,” Hsu said.

The regulator cautioned banks about:

  • Consumers not fully understanding repayment terms
  • Borrowers who may not have credit history applying for buy-now, pay-later loans, making underwriting more difficult
  • Third-party relationships possibly exposing banks to operational or compliance risks outside of their control
  • Limited capture of buy-now, pay-later borrowing activity by credit reporting agencies
  • Complications tied to returning items or disputing purchases

©2023 Bloomberg L.P.