Rohit Chopra, CFPB Director, testifies during a House Financial Services Committee hearing on June 14, 2023.
Tom Williams | Cq-roll Call, Inc. | Getty Images
The Consumer Financial Protection Bureau announced Wednesday that customers of the buy now, pay later industry have the same federal protections as credit card users.
The agency unveiled what it called an “interpretive rule” that holds that BNPL lenders are essentially the same as traditional credit card providers under the decades-old Truth in Lending Act.
This means that the industry – currently dominated by fintech companies – e.g ConfirmsKlarna W PayPal – Returned products or canceled services must be refunded, commercial disputes must be investigated, payments must be paused during those investigations, and invoices must be provided with fees disclosed.
“Regardless of whether a shopper swipes a credit card or uses buy now, pay later, they are entitled to important consumer protections under long-standing laws and regulations already on the books,” CFPB Director Rohit Chopra said in a statement.
The CFPB, which last week won a decisive victory by the Supreme Court, has lobbied aggressively against the U.S. financial industry, issuing rules that reduced late credit card fees and overdraft penalties. The agency, which was formed in the wake of the 2008 financial crisis, began investigating the BNPL industry in late 2021.
High debt
Chopra said during a news conference that the use of digital installment loan services has exploded in recent years, with volumes rising tenfold from 2019 to 2021. Among the CFPB's concerns, he said, is that some users are being given more debt than they can handle.
“Buy now, pay later is now a major part of our consumer credit market, as these loans provide a useful alternative to other options for consumers,” Chopra told reporters. “The CFPB wants to ensure that these new competitive offerings do not gain an advantage by avoiding long-standing rights and responsibilities under the law.”
It is not clear how many BNPL providers are not adhering to 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 these services, the new rule will ensure they are applied consistently across the industry, a senior agency official told reporters.
The new rule will go into effect within 60 days, the official said, and the agency is now accepting public comment on it.
Litigation ahead?
For some time, BNPL providers have expected greater regulation, including efforts to apply existing card rules to the industry. In March, Klarna published a blog post arguing that its zero-interest product was less risky for customers than credit cards — which can often come with high interest rates — and therefore required less oversight.
“Rather than trying to box BNPL into an outdated credit card framework that does little to actually protect consumers, leaders in Washington should craft and implement a BNPL framework that is proportional to the risks it poses,” Klarna said at the time.
In a statement filed on Wednesday, Klarna called the CFPB's move an “important step forward” in BNPL regulation, adding that it had already adhered to standards for refunds, disputes and billing information.
“But it is puzzling that the CFPB has ignored the fundamental differences between interest-free BNPL and credit cards, whose entire business model is based on trapping customers in a cycle of paying extremely high interest rates month after month,” a Klarna spokesperson said. .
The industry's position raises the possibility that, like other financial players including payday lenders, BNPL companies could fight the CFPB's rule by suing the agency.
A CFPB rule capping credit card late fees at $8 per incident, which was scheduled to take effect this month, was challenged and temporarily blocked by a federal judge recently.
