On the 22nd of April, 2024, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule. This rule will allow the consumer agency to regulate BNPL providers, similar to those governing traditional credit card issuers. The rule includes digital user accounts that offer credit access, such as loans under the BNPL model.
It states that providers marketing loans as BNPL must follow consumer protection standards outlined in federal law and regulations. This includes rules about billing disputes, product refunds, service cancellations, and disclosure requirements like periodic billing statements. The CFPB introduced this rule to provide clarity on the obligations that market participants with specific business practices must adhere to, considering the diverse loan offerings within the BNPL sector.
Consumer Agency to Regulate BNPL- Key Takeaways
- Extension of Credit Card Regulations to BNPL Lenders: The Consumer Financial Protection Bureau (CFPB) has issued an interpretive rule that requires Buy Now, Pay Later (BNPL) providers to adhere to consumer protection standards similar to those for credit card issuers. This includes handling disputes, issuing refunds, and providing periodic billing statements.
- CFPB’s Justification and Market Concerns: The CFPB’s decision is based on the view that BNPL loans function similarly to credit cards in many respects, such as offering credit services and charging merchants transaction fees. The Bureau aims to introduce consistency and clarity to the BNPL market, addressing issues like consumer disputes and the lack of standardized disclosures.
- Mixed Industry Reactions: BNPL providers have responded differently to the CFPB’s rule. Affirm supports the initiative, emphasizing the need for consistent industry standards. Conversely, Klarna criticizes the approach, arguing that BNPL and credit cards are fundamentally different products and should not be regulated in the same manner.
- Implementation and Public Feedback: The rule will take effect 60 days after its publication in the Federal Register. The CFPB has opened a comment period until August 1, 2024, to gather public input and refine the regulatory approach to better align with modern financial technologies and consumer credit models.
Background
The CFPB started investigating BNPL programs in 2021 due to rapid market growth and concerns over increasing debt and the handling of consumer data.
In 2022, a CFPB market analysis revealed that BNPL usage surged during the pandemic. Five companies issued 180 million loans totaling more than $24 billion in 2021, marking a nearly tenfold increase from 2019. The analysis found that over 13% of BNPL transactions involved returns, with consumers disputing or returning $1.8 billion worth of transactions among the five firms.
The report highlighted issues such as the absence of standardized disclosures and difficulties in dispute resolution. Since the report’s release, the CFPB has engaged in various activities to deepen its understanding of the market. These include identifying common business practices, conducting supervisory examinations, and other forms of market monitoring and investigation.
Last year, the CFPB shared insights on the financial profiles of BNPL borrowers. In March 2024, the CFPB published its Consumer Response Report for 2023, which documented consumer difficulties with merchants over BNPL issues, including not receiving items and problems canceling loans. The CFPB continues to field complaints about refunds and disputed transactions as BNPL products remain popular among various demographic groups.
CFPB Extends Credit Card Protections to BNPL Lenders
Last month, the CFPB announced its intention to apply certain consumer protection rules from the credit card industry to BNPL lenders. This move aims to increase regulation in the rapidly growing BNPL sector. Companies such as Klarna, Afterpay, and Affirm collaborate with retailers to offer finance options for customer purchases, with repayment made in installments. Despite its growth, this sector has not been subject to a comprehensive federal regulatory framework.
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Under a new interpretive rule issued by the CFPB, BNPL lenders must now resolve customer disputes, issue refunds for returned products, and provide periodic billing statements—requirements that align with those mandated for credit card companies under the Truth in Lending Act (TILA).
Rohit Chopra, the Director of the CFPB, stated that consumers should receive the same protections whether they use a BNPL or credit card service, citing established laws and regulations that support this policy.
Rohit further highlighted that consumers who opt for BNPL at checkout are often unsure about receiving refunds for returned products or whether the lender will assist if the product isn’t as promised.
The CFPB believes this initiative will introduce consistency to the market and is set to become effective 60 days after its publication in the Federal Register. Affirm responded positively, stating that the CFPB’s move to promote consistent industry standards is encouraging.
In their statement, Affirm also called on other BNPL providers to fulfill the industry’s commitment to offering a more flexible and transparent payment alternative compared to traditional methods.
However, Klarna expressed concerns, stating it is perplexing that the CFPB overlooks the key differences between credit cards and BNPL services. Klarna argues that regulating BNPL as if it were a credit card—comparing two fundamentally different products—will not address issues related to consumer credit card debt.
The bureau defended its approach of regulating BNPL (Buy Now, Pay Later) providers in the same manner as credit card companies. It stated that BNPL loans are often used similarly to credit cards for both in-person and online purchases. Additionally, like credit cards, BNPL loans involve credit services and payment processing, and they also result in transaction fees charged to merchants, according to the press release.
A CFPB spokesperson explained that the agency conducted a thorough review of how current laws and regulations pertain to the emerging BNPL lending model. After careful examination, it was concluded that specific elements of the TILA and its implementing regulations are applicable to BNPL loans as they are presently structured.
An “interpretive” law allows an agency to offer the public its initial interpretation of existing laws concerning a specific issue.
Understanding Interpretive Rule
The CFPB recently issued a rule that redefines digital user accounts used for BNPL credit. Under this rule, these accounts are categorized as “creditors” or “card issuers” under Regulation Z subpart B. This includes any account that allows purchasing on credit through non-traditional means such as websites, apps, or browser extensions, aligning them with “credit cards” as described in Regulation Z and TILA. These digital accounts, designed for repeated use, meet the “time to time” usage criteria set out in Regulation Z, even if they do not incorporate the usual credit card fees or interest charges.
BNPL plans, typically arranged as closed-end loans to be paid in up to four installments without additional finance charges, must now provide consumer protections similar to those of traditional credit cards. These protections include:
- Resolving disputes initiated by consumers and halting payments while disputes are resolved;
- Issuing credits and processing refunds when consumers return goods or cancel services;
- Sending regular billing statements akin to those provided with standard credit cards.
The rule requires BNPL providers to follow subpart B, which includes regulations on cardholder liability and the solicitation of credit cards, among other rules. While BNPL products do not fall under “open-end credit” definitions, the new rule mandates that BNPL services manage disputes, process returns, and cancellations, and provide transparent billing statements, similar to traditional credit card companies.
However, BNPL providers are not held to some of the regulations affecting credit card companies, such as caps on penalty fees or assessments of a consumer’s payment capacity.
The CFPB has opened a comment period for public input on this interpretive rule until August 1, 2024, aiming to adjust regulatory practices to better suit modern financial technologies and evolving consumer credit models.
Conclusion
Most major BNPL companies already adhere to protections similar to credit card protections, yet the new rule aims to standardize these across the industry, a CFPB official explained to journalists. The rule targets the commonly used “pay in four” installment plans but won’t enforce all credit card regulations, such as evaluating a consumer’s repayment capacity.
The CFPB believes that applying these consumer protection standards will ensure greater consistency and fairness in the BNPL sector, ultimately benefiting consumers by providing clearer guidelines and enhancing trust in these financial products. The new rule is expected to take effect 60 days after its publication, with the public comment period open until August 1, 2024.
