CFPB Extends Federal Protections to Buy Now, Pay Later Customers

On Wednesday, the Consumer Financial Protection Bureau (CFPB) announced that customers of the rapidly growing buy now, pay later (BNPL) industry will now have the same federal protections as users of traditional credit cards. This decision was formalized through an “interpretive rule” that classifies BNPL lenders as equivalent to credit card providers under the Truth in Lending Act, a federal law established decades ago to protect consumers.

New Protections and Requirements for BNPL Providers

With this new rule, BNPL companies such as Affirm, Klarna, and PayPal must now adhere to the same standards as credit card companies. This includes:

- Refunds for Returned Products or Canceled Services: BNPL providers must issue refunds if customers return products or cancel services.

- Merchant Dispute Investigations: BNPL firms are required to investigate disputes between merchants and customers. During these investigations, payments will be paused.

- Fee Disclosure on Bills: Providers must include detailed fee disclosures on customer bills.

CFPB Director Rohit Chopra emphasized the importance of these protections, stating, “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.”

Increased Scrutiny on BNPL Industry Amid Growing Debt Concerns

The announcement follows a crucial Supreme Court victory for the CFPB, which has been actively pushing for stricter regulations across the financial industry, including measures to reduce credit card late fees and overdraft penalties. The CFPB, established in the wake of the 2008 financial crisis, began scrutinizing the BNPL sector in late 2021.

CFPB’s concerns about the BNPL market stem from the rapid increase in digital installment loan usage. Director Chopra highlighted that the volume of BNPL transactions surged tenfold from 2019 to 2021. He noted that the primary concern is that some consumers may be accumulating more debt than they can manage, stating, “Buy now, pay later is now a major part of our consumer credit market as these loans provide a meaningful alternative to other options for consumers.”

Compliance and Industry Reactions

While it is unclear how many BNPL providers are currently non-compliant with refund and dispute regulations, some companies like Affirm already have processes in place for these activities. The new CFPB rule aims to standardize these practices across the industry. The rule will take effect in 60 days, and the CFPB is currently accepting public comments.

Klarna, one of the prominent BNPL providers, has previously argued that its interest-free products pose less risk to consumers compared to credit cards, which often carry high-interest rates. Klarna's spokesperson commented on the new rule, describing it as a “significant step forward” in BNPL regulation. However, they expressed concerns about the CFPB not distinguishing adequately between interest-free BNPL products and traditional credit cards.

An Affirm spokesman expressed support for the new standards, noting that many of the CFPB's guidelines already align with Affirm’s existing practices. He emphasized Affirm's commitment to responsible credit extension, highlighting that the company does not charge late or hidden fees.

Potential Legal Challenges

The introduction of this rule may lead to legal pushback from the BNPL industry. Like other financial sectors, such as payday lending, BNPL companies might challenge the CFPB’s regulations in court. This possibility mirrors recent events where a federal judge paused the CFPB rule capping credit card late fees at $8 per incident, which was set to be implemented this month.

Conclusion

The CFPB's new rule is a significant development in the regulation of the BNPL industry, aiming to protect consumers by holding BNPL providers to the same standards as credit card companies. As the industry continues to grow, these regulations are intended to ensure transparency, fairness, and consumer safety. With the rule set to take effect in 60 days, the industry’s response and potential legal challenges will be closely watched, marking a pivotal moment in the evolution of consumer financial protections.