Yesterday, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule impacting buy now pay later (BNPL) providers.
BNPL providers have emerged as a popular alternative to credit cards, as their interest rates are typically lower than credit cards. At the same time, many platforms provide the option to buy now and pay later at the point of sale.
The CFPB’s new rule aims to ensure that consumers have the same legal protections and rights that apply to conventional credit cards.
The rules would include the right to dispute a charge or demand a refund if a product is returned.
CFPB Director Rohit Chopra said that currently, consumers using a form of credit do not know if they can get a refund on a transaction.
“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.”
Previously, the CFPB determined that over 13% of BNPL transactions involved a return or dispute.
In 2021, the CFPB reported that consumers disputed or returned $1.8 billion in transactions at the five firms surveyed. The CFPB described the dispute process as creating chaos for some consumers.
The rules will compel BNPL providers to:
- Investigate disputes: Buy Now, Pay Later lenders must investigate disputes that consumers initiate. Lenders must also pause payment requirements during the investigation and sometimes must issue credits.
- Refund returned products or canceled services: When consumers return products or cancel services for a refund, Buy Now, Pay Later lenders must credit the refunds to consumers’ accounts.
- Provide billing statements: Consumers must receive periodic billing statements like the ones received for classic credit card accounts.
Erin Bryan, a financial expert at the law firm Dorsey & Whitney, commented on the interpretive rules.
“Today’s long-awaited interpretive rule from the CFPB confirms that the Bureau views most digital Buy Now, Pay Later installment products to be credit card equivalents for purposes of some provisions of Regulation Z. This is the CFPB’s first major policy announcement since the Supreme Court’s decision in CFPB v. CFSA.”
Bryan said the rule made it clear that BNPL users have the same protections as credit cards, and this is just the beginning of the CFPB’s regulation of the BNPL industry. She said an important question is whether the CFPB’s regulation of BNPL providers will make these products less appealing to consumers.
“The next question is whether the Supreme Court’s review of upcoming Chevron decisions will have an impact on this BNPL move,” said Bryan. “Because this interpretive rules pushes the envelope past existing law into pure agency interpretation, it will be an attractive target for industry challenge should Chevron be overturned.”
American Fintech Council CEO, Phil Goldfeder, said the BNPL rule provides clarity for Fintechs offering he form of credit.
“We are encouraged by the work the CFPB has done to better understand the buy now, pay later industry.”
The Financial Technology Association issued a similar statement welcoming the rules.
“FTA member companies are committed to strong consumer protections, including for disputes and refunds, and agree these protections should be applied consistently across the industry and to those companies claiming to offer Buy Now Pay Later-like services,” said Penny Lee, President and CEO of the Financial Technology Association. “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. 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.”
As the rules will apply to all BNPL providers, certain industry participants should welcome a level playing field for competitors. At the same time, the additional requirements for lenders could lead to increased costs for consumers that utilize the form of credit.
The BNPL interpretive rule is available here.