CFPB Avoids Fights Treating Buy Now, Pay Later Like Credit Cards

Existing consumer protection practices at the largest “buy now, pay later” companies are likely to preclude potential litigation over a new federal rule treating the companies like credit card issuers.

BNPL companies that offer short-term financing allowing customers to pay for products in equal installments over six weeks will explicitly be required to provide refunds for damaged or returned products, investigate disputes, and send out monthly statements to customers under a rule the Consumer Financial Protection Bureau released Wednesday.

But market leaders such as Affirm Holdings Inc., Klarna Bank AB, and Block Inc.'s Afterpay already provide customers with those features, and in some cases go even further than what the CFPB is proposing.

Financial technology trade groups and Klarna called on the CFPB to make a firmer distinction between BNPL and traditional credit cards. But a legal challenge to the rule or attempt to repeal it through Congress seems far-fetched.

“No one wants to argue that BNPL providers should not investigate disputes or refund consumers who return products,” TD Cowen analyst Jaret Seiberg said in a Wednesday client note.

The CFPB’s so-called interpretive rule, set to take effect 60 days after it’s published in the Federal Register, is the agency’s first effort to apply a regulatory framework to BNPL products, which have ballooned in popularity since the Covid-19 pandemic, especially among Black, Latino, and female consumers. Around 14% of US adults used a BNPL service in 2023, up from 12% in 2022, according to the Federal Reserve’s Economic Well-Being of US Households report released this week.

Consumer Complaints

The CFPB says it has seen a growing number of consumer complaints about BNPL, the majority of which deal with refunds and disputed transactions.

“Consumers who use BNPL loans often get the runaround when they are unhappy with a purchase and can face weeks of hassle trying to get a refund,” Jennifer Chien, a senior policy counsel at Consumer Reports, said in a statement Wednesday.

The CFPB’s interpretive rule, which mirrors recommendations it issued in a September 2022 report, should help consumers avoid those inconveniences, she said.

The rule also spells out common baseline practices for covered BNPL companies, said Phil Goldfeder, CEO of the American Fintech Council.

“The Rule recognizes the benefits that responsible BNPL providers offer but more importantly provides consistent industry standards to promote greater choice and transparency for consumers utilizing responsible BNPL products,” he said in a statement.

Affirm, an AFC member that agreed to let the CFPB supervise it directly, said it supports the rule.

Apples and Oranges

Fintechs, while stopping short of a legal threat, said the CFPB did miss some key distinctions between BNPL and traditional credit cards.

“Trying to regulate BNPL like a credit card is like comparing apples with oranges. So today’s announcement is confusing,” Klarna said in a statement Wednesday.

Unlike credit cards, BNPL products—including a popular model enabling consumers to split their purchases into four payments—usually don’t impose late fees for missed payments or charge interest. And BNPL companies, which market themselves as safer alternatives to credit cards, typically don’t allow customers to take on new loans if they miss payments on existing ones, preventing them from building up massive debts.

“We look forward to providing additional comments to the CFPB and distinguishing BNPL from products whose business models rely on revolving debt and high consumer fees,” Penny Lee, the president and CEO of the Financial Technology Association, said in a statement.

Klarna and Afterpay owner Block are FTA members.

The CFPB did make some significant distinctions between BNPL and credit cards in its rule. The biggest is that BNPL providers won’t be required to determine a borrower’s ability to repay before funding a purchase.

Affirm and Klarna already conduct such reviews of customers before a purchase, going beyond the CFPB’s requirements.

Confidence Boost

By avoiding a fight over ability-to-repay requirements, the CFPB made it significantly less palatable for industry groups and congressional Republicans to bring a formal challenge.

“Some of this is just good customer service,” Catherine Brennan, a partner at Hudson Cook LLP who represents fintechs, said by phone.

A dose of regulation could benefit an industry that in some respects has fallen through the cracks at the federal level up to now, said Eamonn Moran, senior counsel at Norton Rose Fulbright and a former CFPB regulatory attorney.

“The additional regulatory backstop could actually help to drive more confidence in this product,” he said.