The Consumer Financial Protection Bureau yesterday issued an interpretive rule to ensure that Buy Now, Pay Later lenders adhere to the same consumer protections as traditional credit card issuers. This significant move mandates that BNPL lenders provide key protections, including the ability for consumers to dispute charges and receive refunds. This rule stems from extensive analysis and a 2022 CFPB study that revealed a tenfold increase in BNPL lending volumes between 2019 and 2021, alongside significant consumer risks such as debt accumulation and lack of standardized disclosures.
The interpretive rule clarifies that BNPL lenders are considered “credit card issuers” under the Truth in Lending Act (TILA). This classification means that consumers using BNPL services are entitled to the same rights and protections as those using traditional credit cards. Specifically, BNPL lenders must investigate billing disputes, pause payment requirements during disputes, and provide refunds for returned products or canceled services. Additionally, consumers must receive periodic billing statements, similar to those received with conventional credit cards.
The CFPB’s decision comes amid the rapid expansion of the BNPL market, which has become a popular alternative to traditional credit cards. Initially focused on apparel and beauty, BNPL lending now spans various merchant categories, including electronics, travel, and services. The CFPB’s rule aims to ensure that the growing BNPL market does not sidestep existing consumer protection laws, thus safeguarding consumers’ rights and promoting transparency.
The CFPB’s 2022 report highlighted the overextension and excessive debt accumulation risks associated with BNPL products. The report noted that more than 13% of BNPL transactions involved a return or dispute, amounting to $1.8 billion in 2021 alone. The interpretive rule addresses these issues by aligning BNPL lenders’ practices with those of traditional credit card issuers, thereby providing consumers with clear disclosures about fees, pricing structures, and their rights.
The CFPB is also seeking public comments on the interpretive rule to determine if further clarifications or revisions are needed. Comments will be accepted until August 1, 2024, and will help inform future rules and guidance related to the BNPL market.
“Buy Now, Pay Later is now a major part of the consumer credit market, as these loans provide a meaningful alternative to other options for consumers,” said CFPB Director Rohit Chopra. “However, the CFPB wants to ensure that these new competitive offerings are not gaining an advantage by sidestepping the longstanding rights and responsibilities enshrined under the law.”
In response to the CFPB’s announcement, Klarna, a BNPL provider, said trying to compare credit cards and BNPL is like comparing apples and oranges.
“Trying to regulate BNPL like a credit card is like comparing apples with oranges,” the company said. “So today’s announcement is confusing. Klarna is already working to a high standard in investigating disputes, pausing payments, providing consumers with comprehensive billing statements.
“It is our hope that the CFPB will recognize the major differences between BNPL and credit cards, as they operate in fundamentally different ways.”
