Buy now, pay later Businesses 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 of the fast-growing “buy now, pay later” industry enjoy the same federal protections as credit card users.

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

That means the sector is currently dominated by fintech companies such as To confirmKlarna and PayPal – must provide refunds for returned products or canceled services, must investigate disputes with merchants and pause payments during those investigations, and must provide invoices with disclosure of charges.

“Regardless of whether a customer uses a credit card or buy now, pay later, they are entitled to important consumer protections under the long-standing laws and regulations that already exist,” CFPB Director Rohit Chopra said in a news release.

The CFPB, which won a crucial Supreme Court victory last week, has cracked down on the U.S. financial industry by issuing rules that reduce credit card late fees and overdraft fees. The agency, created in the wake of the 2008 financial crisis, started investigating the BNPL sector by the end of 2021.

Rising debts

The use of digital installment services has exploded in recent years, with volumes increasing tenfold between 2019 and 2021, Chopra said at a media briefing. One of the CFPB's concerns is that some users are being given more debt than they can handle, he said.

“Buy now, pay later is now an important part of our consumer lending market because these loans provide a meaningful alternative to other options for consumers,” Chopra told reporters. “The CFPB wants to ensure that this new competitive offering does not provide an advantage by circumventing long-standing rights and responsibilities set forth in the law.”

It is unclear how many BNPL providers fail to meet refund and dispute requirements; on the website for To confirmThere are, for example 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 take effect in 60 days, and the agency is now accepting public comment on it, the official said.

Lawsuit looming?

BNPL providers have long anticipated more regulation, including efforts to apply existing card rules to the sector. In March, Klarna published a message arguing that the interest-free product was less risky for customers than credit cards – which often come with steep interest rates – thus requiring less supervision.

“Rather than trying to cram BNPL into an outdated credit card framework that does little to actually protect consumers, Washington leaders should create and implement a framework for BNPL that is commensurate with the risk it poses,” Klarna said at the time.

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

The CFPB rule that was set to take effect this month, capping late credit card fees at $8 per incident, was challenged and paused by a federal judge last week.

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