Regulators Tighten Rules on ‘Buy Now, Pay Later’ Services

In a move to enhance consumer protections, the Consumer Financial Protection Bureau (CFPB) announced new regulations for the rapidly growing “buy now, pay later” (BNPL) industry. These new rules, which liken BNPL services to traditional credit card providers, aim to provide consumers with similar protections, including “the right to dispute charges and demand refunds for returned purchases.”

Under the new regulations, BNPL lenders must:

• Provide periodic billing statements similar to those issued for credit cards.
• Investigate consumer disputes and pause payment requirements during the investigation.
• Refund returned products or canceled services to consumers’ accounts.

The CFPB’s decision comes in response to numerous customer complaints about difficulties in resolving disputes and returning items. During a recent press briefing, CFPB officials highlighted the need for these protections as the popularity of BNPL services surged during the pandemic, driving significant growth in online shopping.

BNPL services, welcomed by many as an interest-free way to purchase items from clothing to travel, allow borrowers to pay over time, typically in four installments over six weeks. Despite their convenience, these services have been criticized for lacking consumer protections found with traditional credit cards.

The CFPB’s interpretive rule asserts that BNPL lenders must now operate under similar guidelines as credit card providers. This includes offering consumers the ability to dispute charges and receive refunds for returned items. Additionally, BNPL lenders are required to provide periodic billing statements, much like those for credit card accounts. These changes will take effect in 60 days.

While these rules increase oversight, they stop short of requiring BNPL providers to verify borrowers’ ability to repay loans, a measure that consumer advocates have pushed for. Analysts suggest that avoiding this requirement spares the industry from the most stringent regulations, which could have significantly impacted operations.

The BNPL industry has seen exponential growth, with the five largest providers issuing $24 billion in loans in 2021, a dramatic increase from $2 billion in 2019. According to Bankrate, half of shoppers ages 25 to 44 use BNPL services, and Adobe Analytics projects that BNPL could drive up to $84 billion in spending this year, a 13% increase from last year.

Despite their popularity, BNPL plans can carry substantial fees for missed payments, raising concerns about consumer debt. Additionally, loans from BNPL companies like Affirm, Afterpay, Klarna, PayPal, and Zip are typically not reported on consumers’ credit reports or reflected in their credit scores. This lack of transparency has led to fears that users may accumulate excessive debt, unnoticed by other lenders or regulators.

However, some companies are beginning to address these concerns. In February, Apple announced that loans made through its Apple Pay Later program would be reported to Experian, one of the major credit bureaus, marking a shift toward greater transparency in the BNPL sector.