Buy now, pay later (BNPL) companies are waking up to a new reality as the Consumer Financial Protection Bureau (CFPB) has issued an interpretive rule that immediately changes the status of these businesses to treat them as if they were credit card companies.

The rule, which goes into effect 60 days from now, will require BNPL firms to comply with the same consumer protection requirements imposed on credit card issuers to be able to offer their products to customers in the United States.

Under the new guidelines, BNPL firms must investigate billing disputes initiated by consumers, issue refunds for canceled services or returned merchandise, and provide customers with regular billing statements, just as credit card companies are obligated to do. You might be surprised to hear that BNPL companies were obligated to provide these consumer protections already but at least they are now (in 60 days).

Booming BNPL Market Draws Regulatory Scrutiny

The CFPB’s new directive comes amid the rapid rise of BNPLs in the US market and their growing popularity among consumers in the past few years. The largest players in this segment of the financial industry, which include Affirm, Afterpay, and Klarna, allow consumers to make purchases with a down payment and interest-free installments.

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While marketed as an alternative to credit cards, the CFPB found that BNPL lending is “often used as a close substitute for conventional credit cards to purchase goods and services.” Like credit cards, BNPL combines payment processing and credit services while charging merchant fees.

According to data from Adobe Analytics, BNPL online spending stood at $75 billion in 2023. Its rapid growth has sparked concerns about insufficient consumer protections. The CFPB says that they have been handling an increasingly larger number of complaints. They cited that 13% of BNPL transactions in 2021 with the five largest firms involved disputes or returns totaling approximately $1.8 billion.

“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,” said CFPB Director Rohit Chopra. “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.”

New BNPL Requirements Include Sending Statements and Issuing Refunds

Under the interpretive rule, which addresses the provisions set forth in the Truth in Lending Act, BNPL providers must adhere to the following requirements:

  • Investigate Disputes: If a consumer disputes a transaction, the BNPL lender must investigate the claim. Pending the investigation, the lender has to pay all payment requirements until the matter is settled and issue credits if applicable.
  • Issue Refunds: When a product or service is returned or canceled, the BNPL company must issue a refund to the customer’s account.
  • Send Billing Statements: Consumers must receive periodic statements detailing their BNPL balances and transactions, similar to credit card statements.

The agency believes that these requirements will help provide consistency and transparency for BNPL borrowers. However, the CFPB stopped short of subjecting BNPL firms to other credit card rules like assessing a customer’s ability to repay before allowing them to access a credit line.

Mixed Industry Reactions Amid Perceived “Fundamental” Differences Between BNPL and Credit Cards

While some major BNPL players have welcomed the enforcement of these rules, there is also some pushback from companies who believe that they impose a heavy operational and financial burden on their businesses.

Affirm CEO Max Levchin said that his company is “pleased that the Bureau is promoting consistent industry standards” and went on to say that these align with how his firm currently operates.

However, industry groups argue that the CFPB has overlooked key differences between BNPL and credit card lending models.

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“Trying to regulate BNPL like a credit card is like comparing apples with oranges,” a statement from Klarna addressing the rule change reads.

Meanwhile, the CEO of the Financial Technology Association, Penny Lee, said: “BNPL products are fundamentally different from credit cards: these products have zero interest on outstanding balances, no ability to revolve a balance, and a profit model centered on user success.”

He added: “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.”

Keep all of the comments about the new rule from BNPL companies with a massive grain of salt, however, as they have a huge incentive to exaggerate and fight against the new rule.

Implementing the Rules Could be Costly for Smaller Players and Lead to Industry Consolidation

For the biggest BNPL companies, most of which already extend some credit card-style protections voluntarily, the new rules may have a limited operational impact. Affirm and Klarna, for instance, investigate disputes and process refunds.

However, the regulations could pose an unbearable burden on smaller BNPL players that have not yet implemented robust systems for dispute resolution, refunds, and billing statements.

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The overhead costs of complying with these rules will be a challenge for some of the leaner BNPL operations out there. This could result in further consolidation in the industry if the business model becomes unprofitable unless a certain scale is reached.

There are also concerns that the new requirements could prompt BNPL firms to impose restrictions when extending credit as they will now face tougher scrutiny and are subject to stricter rules.

Jennifer Chien, senior policy counsel at Consumer Reports, stressed the need for these rules by highlighting that customers “often get the runaround,” referring to some lengthy and confusing procedures they face in some cases when they try to get a refund on their purchases.

BNPL Companies Have Until August 1st to Send Their Comments to the CFPB

This week’s rule change from the CFPB represents another major step to regulating the up-and-coming BNPL market. The full implications of the new rules remain to be seen as companies start to implement the required changes to operate in full compliance.

The rule will be open for comments until August 1st. Based on the statements from industry groups and certain comments, they will surely give the CFPB input that influences regulators to change their view about how BNPLs operate and why they are different from traditional credit card issuers.

“The additional regulatory backstop could actually help to drive more confidence in this product,” commented a former CFPB attorney.

Whatever happens to the BNPL landscape following this rule change will likely impact a big group of people considering that statistics from the Federal Reserve indicate that, in 2023, 14% of adults in the United States used a BNPL service.