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Buy now, pay later (BNPL) lenders in the US will be required to give their customers similar protections to credit card companies, such as the right to a refund and the ability to dispute potential charges, under regulatory guidance issued last week by the Consumer Financial Protection Bureau (CFPB).
Leading lenders in the BNPL sector have rejected the comparison to card companies, saying they offer a valuable and transparent service to many households.
Rohit Chopra, the CFPB director, said that a two-year inquiry had shown the BNPL concept to bring increased debt accumulation and overextension for consumers. He cited the original definition of a credit card as given in the Truth in Lending Act in 1968, which was deliberately “defined to include devices both known and unknown” to allow for interpretative changes.
“The CFPB is issuing this interpretive rule to make clear how the agency would apply long-standing law and regulation to this popular form of credit,” he said in a press call on Wednesday (May 22).
One industry source close to the topic welcomed the news, telling Vixio that BNPL is “an important financial tool that needs more discussion”.
Bringing BNPL firms in line with credit card companies could change the way they are seen by consumers. The potential for greater impact on credit reports in particular could prove problematic for the large cohort of low-income BNPL customers. The share prices of BNPLs such as Affirm and PayPal traded lower on Thursday.
Industry reaction
Spokespeople for BNPL companies said it was a mistake to regulate them the same as credit card companies, even though they said they welcomed more regulation in principle.
“It is baffling that the CFPB has overlooked the fundamental differences between interest-free BNPL and credit cards, whose whole business model is based on trapping customers into a cycle of paying sky-high interest rates month after month,” a spokesperson for Klarna said.
They said the company had already taken steps to bring itself to the standards of credit cards and has not “waited for regulation”.
A spokesperson for Affirm suggested that the product model of BNPL offers a different solution to payment needs than that of a credit card and should not be lumped alongside them.
“Consumers use our product because we offer a transparent and flexible way to pay over time with no late or hidden fees,” they said. “Consumers can pay at their own pace in biweekly or monthly payments, rather than entirely up front. Unlike many credit cards and other BNPL options, Affirm doesn’t charge any hidden fees, not even late fees.”
This service allows consumers a sense of control and the ability to manage their finances, they said. Although most US households carry credit card balances forward from month to month with interest compounding into principal, BNPL products do not allow consumers “to ‘revolve’ by design”, they said.
“I would also add that the adoption of more flexible and transparent payment options and the shift away from credit cards toward products like Affirm is a secular trend as consumers vote with their wallets,” the spokesperson said.
On May 16, the CFPB survived a major legal challenge after the US Supreme Court ruled that its funding structure was not unconstitutional in a 7-2 vote. The ruling meant that the CFPB can continue to fund itself directly through the Federal Reserve System, rather than through Congress.
The court’s nine justices filed an 18,000-word opinion that struck down a challenge to the CFPB brought by two trade associations. This marks its first rule change since the victory.
