CFPB’s new rule aligns BNPL with credit card standards, sparks industry reactions

The Consumer Financial Protection Bureau (CFPB) has issued an interpretive rule relating to Buy Now, Pay Later regulations in the US. This new directive, announced on Wednesday, positions BNPL services squarely under the regulatory umbrella of the decades-old Truth in Lending Act, effectively granting consumers the same federal protections they enjoy with credit cards.

The CFPB’s announcement comes as a response to the rapid expansion of the BNPL sector, which has seen a significant uptick in consumer usage and, consequently, an increased need for standardised consumer safeguards.

This means that companies in the industry have to make refunds for returned items or cancelled services, look into disputes with sellers, temporarily stop payments while investigating, and show bills with details about fees.

“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 recently won a vital case in the Supreme Court, has been challenging the U.S. financial sector by making rules that cut credit card late fees and overdraft penalties. Established after the 2008 financial crisis, the agency started looking into the BNPL industry towards the end of 2021.

BNPL market growth and rising debt

The BNPL market, dominated by fintech giants such as Affirm, Klarna, and PayPal, has experienced a meteoric rise, with transaction volumes surging tenfold from 2019 to 2021. This explosive growth has not gone unnoticed by federal watchdogs, prompting the CFPB to step in and extend the protective measures of the Truth in Lending Act to this nascent sector.

“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. 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,” said Chopra during a media briefing, expressing concerns that some users are given more debt than they can handle.

While it’s unclear how many BNPL providers fail to comply with refund and dispute requirements, many BNPL providers offer these services. With the new ruling, CFPB wants to ensure consistent application of these requirements across the industry.

The rule will go into effect in 60 days, with the agency currently seeking public feedback.

Industry reactions

The CFPB’s ruling has sparked a spectrum of responses from key players in the BNPL sector.

Affirm says it is “encouraged that the CFPB is promoting consistent industry standards, many of which already reflect how Affirm operates, to provide greater choice and transparency for consumers”.

The company stated that is “encouraged that the CFPB is promoting consistent industry standards to provide greater choice and transparency for consumers,“ noting that this largely reflects their existing practices.

“Affirm’s success is aligned with responsibly extending access to credit as we do not charge late or hidden fees. We urge other companies that offer buy now, pay later products to live up to the industry’s promise to provide consumers with a more flexible and transparent alternative to other payment options,” said an Affirm spokesman.

Conversely, Klarna has voiced strong reservations, labelling the decision as “baffling” and criticising the CFPB for not recognising the fundamental differences between BNPL services 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 is already working to a high standard in investigating disputes, pausing payments, providing consumers with comprehensive billing statements,” commented the Swedish firmed in a statement they published after the CFPB’s new ruling announcement.

The firm argues that their no-interest product presents a lower risk to consumers than credit cards, which often entail steep interest rates and can entrap customers in cycles of debt.

Klarna closed their statement saying they “hope that the CFPB will recognize the major differences between BNPL and credit cards, as they operate in fundamentally different ways.”

Meanwhile, shares of Affirm fell by 5.2% on Wednesday, while PayPal saw a 3% decline.

Implications for BNPL providers and consumers

The CFPB’s interpretive rule brings big changes for both BNPL providers and their consumers.

Providers are now tasked with ensuring compliance with the Truth in Lending Act, which might mean changing their dispute resolution and refund processes. This could lead to increased operational costs as systems are updated to align with federal standards.

For consumers, the rule promises greater protection and consistency across BNPL transactions. They can now expect the same level of service regarding refunds and disputes as they would with credit cards, potentially increasing consumer confidence in using BNPL services.

However, the rule also raises questions about the future of BNPL’s competitive edge, which has been partly attributed to its streamlined, less regulated nature.

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