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

The Consumer Financial Protection Bureau declared on Wednesday that customers of the burgeoning buy now, pay later industry have the same federal protections as users of credit cards.

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 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.

“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,” CFPB Director Rohit Chopra said in a release.

The CFPB, which last week was handed a crucial victory by the Supreme Court, has pushed hard against the U.S. financial industry, issuing rules that slashed credit card late fees and overdraft penalties. The agency, formed in the aftermath of the 2008 financial crisis, began investigating the BNPL industry in late 2021.

The use of digital installment loan-type services has ballooned in recent years, with volumes surging tenfold from 2019 to 2021, Chopra said during a media briefing. Among CFPB concerns are that some users are given more debt than they can handle, he said.

“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,” Chopra told reporters. “The CFPB wants to make sure that these new competitive offerings are not gaining an advantage by sidestepping longstanding rights and responsibilities enshrined under the law.”

It’s unclear how many BNPL providers don’t comply with refund and dispute requirements; on the website for Affirm, for instance, there are pages for both activities.

While the CFPB acknowledged that many BNPL players offer those services, the new rule will ensure that they are applied consistently across the industry, a senior agency official told reporters.

The new rule will go into effect in 60 days, and the agency is now accepting public commentary on it, the official said.

For some time, BNPL providers have anticipated greater regulation, including efforts to apply existing card rules onto the industry. In March, Klarna published a post arguing that its no-interest product was less risky for customers than credit cards — which can often come with steep interest rates — thus requiring less oversight.

“Instead of trying to jam BNPL into an outdated credit card framework that does little to actually protect consumers, leaders in Washington should draft and implement a framework for BNPL that is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

In a statement 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.

“But it is baffling that the CFPB has overlooked the fundamental differences between interest-free BNPL and credit cards, whose whole business model is based on trapping customers into a cycle of paying sky-high interest rates month after month,” said a Klarna spokesperson.

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

The CFPB rule capping credit card late fees at $8 per incident, which was set to go into effect this month, was challenged and paused by a federal judge recently.