Rohit Chopra, Director of the CFPB, testifies during a hearing of the House Financial Services Committee on June 14, 2023.
Tom Williams | Cq-roll Call, Inc. | Getty Images
The Consumer Financial Protection Bureau said Wednesday that customers in the emerging “buy now, pay later” industry enjoy the same federal protections as credit card users.
The agency introduced a so-called “interpretive rule” that essentially equates BNPL lenders with traditional credit card providers under the decades-old Truth in Lending Act.
This refers to the industry that is currently dominated by fintech companies ConfirmKlarna and PayPal – must provide refunds for returned products or canceled services, investigate merchant disputes and suspend payments during these investigations, and provide invoices with fee information.
“Regardless of whether a shopper uses a credit card or buy now, pay later, they are entitled to important consumer protections under long-standing laws and regulations already in effect,” CFPB Director Rohit Chopra said in a statement Press release.
The CFPB, which won a decisive victory from the Supreme Court last week, has cracked down on the U.S. financial industry, issuing rules that dramatically reduced late fees and overdraft penalties on credit cards. The agency, founded after the 2008 financial crisis, began investigating the BNPL industry in late 2021.
Rising debts
The use of digital installment loan services has increased significantly in recent years, with volumes increasing tenfold from 2019 to 2021, Chopra said during a media briefing. Among the CFPB’s concerns is that some users will be left with more debt than they can handle, he said.
“Buy now, pay later has now become an important part of our consumer credit market as these loans provide a viable 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 under the law.”
It is unclear how many BNPL providers are not complying with refund and dispute resolution requirements. For example, Affirm’s website has 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 comments on it, the official said.
Is a legal dispute imminent?
For some time now, BNPL providers have been anticipating greater regulation, including efforts to apply existing card rules to the industry. In March, Klarna published a post arguing that its interest-free product was less risky for customers than credit cards – which often come with high interest rates – and therefore required less oversight.
“Rather than trying to force BNPL into an outdated credit card framework that does little to actually protect consumers, leaders in Washington should design and implement a framework for BNPL that is proportionate to the risk involved,” Klarna said at the time.
In a statement issued on Wednesday, Klarna called the CFPB’s move a “significant step forward” in BNPL regulation, adding that the company already complies with 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 entire business model is based on luring customers into a cycle of paying exorbitant interest month after month,” said a Klarna spokesperson.
The industry’s stance raises the possibility that BNPL companies, like other financial players, including payday lenders, could challenge the CFPB rule by suing the agency.
The CFPB rule capping credit card late fees at $8 per incident, which was set to take effect this month, was recently challenged and stayed by a federal judge.
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2024-05-22 13:02:22
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