Rohit Chopra, director of the CFPB, 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 declared on Wednesday that customers of the burgeoning buy now, pay later industry have the identical federal protections as users of bank cards.
The agency unveiled what it called an “interpretive rule” that deemed BNPL lenders essentially similar to traditional bank card providers under the decades-old Truth in Lending Act.
Meaning the industry — currently dominated by fintech firms like Affirm, Klarna and PayPal — must make refunds for returned products or canceled services, must investigate merchant disputes and pause payments during those probes, and must provide bills with fee disclosures.
“No matter whether a consumer swipes a bank card or uses Buy Now, Pay Later, they’re entitled to essential consumer protections under long-standing laws and regulations already on the books,” CFPB Director Rohit Chopra said in a release.
The CFPB, which last week was handed a vital victory by the Supreme Court, has pushed hard against the U.S. financial industry, issuing rules that slashed bank card late fees and overdraft penalties. The agency, formed within the aftermath of the 2008 financial crisis, began investigating the BNPL industry in late 2021.
Surging debt
Using digital installment loan-type services has ballooned lately, with volumes surging tenfold from 2019 to 2021, Chopra said during a media briefing. Amongst CFPB concerns are that some users are given more debt than they’ll handle, he said.
“Buy now, pay later is now a serious a part of our consumer credit market as these loans provide a meaningful alternative to other options for consumers,” Chopra told reporters. “The CFPB desires to ensure that these latest competitive offerings are usually not gaining a bonus by sidestepping longstanding rights and responsibilities enshrined under the law.”
It’s unclear what number of BNPL providers don’t comply with refund and dispute requirements; on the web site for Affirm, for example, there are pages for each activities.
While the CFPB acknowledged that many BNPL players offer those services, the brand new rule will be certain that they’re applied consistently across the industry, a senior agency official told reporters.
The brand new rule will go into effect in 60 days, and the agency is now accepting public commentary on it, the official said.
Litigation ahead?
For a while, BNPL providers have anticipated greater regulation, including efforts to use existing card rules onto the industry. In March, Klarna published a post arguing that its no-interest product was less dangerous for purchasers than bank cards — which may often include steep rates of interest — thus requiring less oversight.
“As a substitute of attempting to jam BNPL into an outdated bank card framework that does little to really protect consumers, leaders in Washington should draft and implement a framework for BNPL that’s proportionate to the chance it poses,” Klarna said on the time.
In a press release provided Wednesday, Klarna called the CFPB move a “significant step forward” in BNPL regulation, adding that it already adhered to standards for refunds, disputes and billing information.
“Nevertheless it is baffling that the CFPB has ignored the elemental differences between interest-free BNPL and bank cards, whose whole business model is predicated on trapping customers right into a cycle of paying sky-high rates of interest month after month,” said a Klarna spokesperson.
The industry’s stance raises the likelihood that, like other financial players including payday lenders, BNPL corporations could beat back against the CFPB rule by suing the agency.
The CFPB rule capping bank card late fees at $8 per incident, which was set to enter effect this month, was challenged and paused by a federal judge recently.
