Firms offering ‘Buy Now, Pay Later’ services must adhere to U.S. credit card laws

The Consumer Financial Protection Bureau (CFPB) announced on Wednesday that federal protections identical to those given to credit card users also apply to customers of the rapidly growing buy now, pay later (BNPL) industry.

The CFPB introduced what it referred to as an “interpretive rule”, which essentially equates BNPL lenders with traditional credit card issuers under the longstanding Truth in Lending Act.

This means that prominent fintech firms in the industry like Affirm, Klarna, and PayPal must issue refunds for returned goods or cancelled services, resolve merchant disputes, halt payments during investigations, and provide detailed billing.

“Whether a consumer uses a credit card or opts for Buy Now, Pay Later, they are entitled to essential consumer protections under existing laws and regulations,” stated Rohit Chopra, the CFPB Director, in a press release.

The CFPB, which recently scored a significant win in the Supreme Court, has been taking firm action against the U.S. financial industry, imposing rules that have reduced credit card late fees and overdraft charges. The agency, established in the aftermath of the 2008 financial crisis, initiated an investigation into the BNPL industry in late 2021.

Chopra noted during a media briefing that the usage of digital installment loan-type services has soared in recent years, with volumes increasing tenfold from 2019 to 2021. One of the CFPB’s concerns is that some users are being burdened with more debt than they can manage.

“Buy now, pay later has become a significant part of our consumer credit market as these loans offer a meaningful alternative to other options for consumers,” Chopra informed journalists. “The CFPB aims to ensure that these competitive new offerings are not gaining an upper hand by circumventing longstanding rights and responsibilities set out under the law.”

It is unclear how many BNPL providers do not comply with the requirements for refunds and disputes; for example, Affirm’s website has separate pages for both of these activities.

A senior agency official told reporters that while the CFPB recognises that many BNPL companies offer these services, the new rule will guarantee their consistent application across the industry.

The new rule will take effect in 60 days, and the agency is currently accepting public comments on it, the official added.

BNPL providers have been expecting increased regulation for a while now, including attempts to extend existing card rules to the industry. In March, Klarna made a case that its no-interest product poses less risk to consumers than credit cards —which often come with high interest rates— thereby requiring less oversight.

“Instead of trying to fit BNPL into an outdated credit card framework that does little to genuinely protect consumers, leaders in Washington should draft and adopt a BNPL framework that is proportional to its risk,” Klarna suggested at the time.

In a statement released on Wednesday, Klarna described the CFPB’s action as a “major advancement” in BNPL regulation, stating that it already meets standards for refunds, disputes, and billing information.

“However, it is perplexing that the CFPB has ignored the fundamental differences between interest-free BNPL and credit cards, whose entire business model is built on trapping customers in a cycle of paying exorbitant interest rates month after month,” a Klarna spokesperson said.

The industry’s position suggests that BNPL companies, like other financial entities including payday lenders, could resist the CFPB rule by filing lawsuits against the agency.

A federal judge recently suspended the CFPB rule that limits credit card late fees to $8 per incident, which was set to be implemented this month.