The federal government is stepping in to shield shoppers from vulnerability as the Buy Now, Pay Later (BNPL) solutions sector takes off.
The Consumer Financial Protection Bureau (CFPB) this week issued an interpretive rule establishing that BNPL lenders are, for all intents and purposes, credit card providers—and they must now adhere to the same regulations.
In accordance with the distinction, they will now be required to provide consumers with the legal protections and rights that apply to conventional credit cards. The decision was made after a years-long inquiry into the rapidly growing market and its implications for American consumers, including debt accumulation and data harvesting.
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The CFPB’s ruling centers on the consumer’s right to dispute charges and demand a refund from the lender after making a return on a purchase. According to the CFPB, which first began probing the issue in 2021, BNPL continues to see complaints related to refunds and disputed transactions.
In fact, the government agency’s reporting showed that more than 13 percent of BNPL transactions involved a return or dispute in 2021, amounting to $1.8 billion in transactions at the five firms surveyed, which included Affirm, Afterpay, Klarna, PayPal and Zip. The CFPB said the failure to provide dispute resolution can be harmful or frustrating to users when they return merchandise and continue to be billed, or don’t receive a refund for the payments already made.
“When consumers check out and choose Buy Now, Pay Later, they don’t know if they will get a refund if they return their product or whether the lender will help them if they didn’t get what was promised,” CFPB Director Rohit Chopra explained. “Regardless of whether a shopper swipes a credit card or uses Buy Now, Pay Later, they are entitled to important consumer protections under longstanding laws and regulations already on the books.”
Chopra noted that the BNPL sector has exploded in recent years, with lenders touting the ability to purchase products and pay for them over time, usually in four separate payments made weeks or months apart. The services are marketed as a means of helping shoppers manage their spending on expensive purchases, all with zero interest. While the providers initially heavily targeted consumer products categories like beauty and fashion, today, consumers can purchase all kinds of items, from televisions to appliances, as well as services, like airline tickets.
When the CFPB’s study began, it found that BNPL is now being routinely used as a stand-in for conventional credit cards. When shoppers check out online, they are often given the choice to pay with Afterpay or Klarna alongside the option to pay with a Visa or Mastercard. And now, BNPL solutions have been integrated into a multitude of e-commerce sites, mobile apps and browser extensions, making them a ubiquitous option for digital shopping. Like credit cards, BNPL combines payment processing and credit services, charging transaction fees to merchants.
“When Congress defined ‘credit card’ under the Truth in Lending Act, it deliberately defined the term to include devices both known and unknown,” Chopra said Wednesday. “While we typically think of a credit card as a piece of plastic with an embossed number, the term encompasses a wide range of devices,” he added.
BNPL services have been found to fit the bill. Moving forward, they must investigate disputes that consumers initiate and pause payment requirements during those investigations. If a return is made or a sale is canceled, a refund must be credited to the user’s account. BNPL providers must also provide periodic billing statements in the same vein as classic credit cards.
“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,” Chopra added. “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.”
The CFPB is now encouraging the public to submit comments on this week’s interpretive rule in order to inform the agency where more clarity is needed, including through rules and guidance. Comments will be accepted through Aug. 1.
