Buy now, pay later firms must comply with U.S. credit card laws

CFPB Director Rohit Chopra 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 said Wednesday that customers in the booming “buy now, pay later” industry enjoy the same federal protections as credit card users.

The agency unveiled what it called an “interpretive rule” that BNPL lenders are essentially the same as traditional credit card providers under the decades-old Truth in Lending Act.

This means that the sector – currently dominated by fintech companies like AffirmKlarna and PayPal – must issue refunds for returned products or canceled services, must investigate merchant disputes and suspend payments during such investigations, and must provide invoices showing charges.

“Whether a buyer swipes 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,” said CFPB Director, Rohit Chopra, in a press release.

The CFPB, which won a crucial victory at the Supreme Court last week, has lobbied against the U.S. financial industry, enacting rules that reduce credit card late fees and overdraft penalties. The agency, created in the wake of the 2008 financial crisis, began investigating the BNPL sector in late 2021.

Increase in debt

The use of digital installment loan-style services has exploded in recent years, with volumes increasing tenfold between 2019 and 2021, Chopra said during a press briefing. Among the CFPB’s concerns is that some users are being saddled with larger debts than they can handle, he said.

“Buy now, pay later is now a significant part of our consumer credit market, as these loans provide a meaningful 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 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 the Affirm website, for example, there are pages for both activities.

Although 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 take effect in 60 days, and the agency is now accepting public comments on it, the official said.

An upcoming dispute?

BNPL providers have been anticipating tighter regulation for some time, including efforts to apply existing card rules to the sector. In March, Klarna published an article claiming that its interest-free product was less risky for customers than credit cards – which can often come with high interest rates – thus requiring less oversight.

“Instead of trying to lock BNPL into an outdated credit card framework that does little to actually protect consumers, leaders in Washington should develop and implement a framework for BNPL that is proportionate to the risk that he poses,” Klarna said at the time.

The industry’s resistance raises the possibility that, like other financial players, including payday lenders, BNPL companies could oppose the CFPB’s rule by suing the agency.

The CFPB’s rule capping late fees on credit cards at $8 per incident, which was set to take effect this month, was recently challenged and suspended by a federal judge.

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Aimant les mots, Sara Smith a commencé à écrire dès son plus jeune âge. En tant qu'éditeur en chef de son journal scolaire, il met en valeur ses compétences en racontant des récits impactants. Smith a ensuite étudié le journalisme à l'université Columbia, où il est diplômé en tête de sa classe.Après avoir étudié au New York Times, Sara décroche un poste de journaliste de nouvelles. Depuis dix ans, il a couvert des événements majeurs tels que les élections présidentielles et les catastrophes naturelles. Il a été acclamé pour sa capacité à créer des récits captivants qui capturent l'expérience humaine.
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