CFPB Director Rohit Chopra testifies during a House Financial Services Committee hearing on June 14, 2023.
Tom Williams | Cq-roll Call, Inc. | fake images
The Consumer Financial Protection Bureau stated Wednesday that customers in the burgeoning buy now, pay later industry have the same federal protections as credit card users.
The agency unveiled what it called an “interpretive rule” that considered BNPL lenders to be essentially the same as traditional credit card providers under the decades-old Truth in Lending Act.
That means the industry, currently dominated by fintech companies like SayKlarna and PayPal — you must make refunds for returned products or canceled services, you must investigate trade disputes and suspend payments during those investigations, and you must provide invoices with fee information.
“Regardless of whether a shopper uses a credit card or uses Buy Now, Pay Later, they are entitled to important consumer protections under long-standing laws and regulations already in place,” CFPB Director Rohit Chopra said in a statement.
The CFPB, which last week won a crucial Supreme Court victory, has pushed hard on the U.S. financial industry, issuing rules that reduced credit card late fees and penalties for overdrafts. The agency, formed in the wake of the 2008 financial crisis, began investigating the BNPL industry in late 2021.
Growing debt
Use of digital installment loan-type services has skyrocketed in recent years, with volumes increasing tenfold between 2019 and 2021, Chopra said during a press conference. One of the CFPB's concerns is that some users will receive more debt than they can handle, he said.
“Buy now, pay later is now an important part of our consumer credit market as these loans provide a significant alternative to other options for consumers,” Chopra told reporters. “The CFPB wants to ensure that these new competitive bids do not gain an advantage by circumventing long-standing rights and responsibilities enshrined in law.”
It is unclear how many BNPL providers fail to comply with refund and dispute requirements; On Affirm's website, for example, there are pages for both activities.
While the CFPB acknowledged that many BNPL players offer such services, the new rule will ensure they are applied consistently across the industry, a senior agency official told reporters.
The new rule will take effect in 60 days and the agency is now accepting public comments on it, the official said.
A litigation ahead?
For some time now, BNPL providers have anticipated increased regulation, including efforts to enforce existing card rules in the industry. In March, Klarna published a post arguing that its interest-free product was less risky for customers than credit cards (which can often carry high interest rates), so it required less oversight.
“Instead of trying to lock BNPL into an outdated credit card framework that does little to protect consumers, leaders in Washington should draft and implement a framework for BNPL that is proportionate to the risk it poses,” Klarna said in that moment.
The industry's resistance raises the possibility that, like other financial players, including payday lenders, BNPL companies could oppose the CFPB rule by suing the agency.
The CFPB's rule limiting credit card late payment fees to $8 per incident, which was supposed to go into effect this month, was challenged and put on hold by a federal judge last week.
