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

In order to bolster consumer protections, the Consumer Financial Protection Bureau (CFPB) has introduced new regulations for the fast-growing “buy now, pay later” (BNPL) industry. These new regulations treat BNPL services similarly to traditional credit card providers, aiming to offer consumers comparable protections such as the right to dispute charges and request refunds for returned purchases.

The new rules mandate that BNPL lenders must:

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

The decision by the CFPB stems from widespread customer complaints regarding challenges in resolving disputes and returning items. During a recent press briefing, CFPB officials emphasized the necessity of these protections as the popularity of BNPL services soared during the pandemic, leading to substantial growth in online shopping.

While BNPL services have been well-received by many as a way to buy items interest-free, from clothing to travel, these services allow borrowers to pay over time, typically in four installments spread over six weeks. Despite their convenience, BNPL services have faced criticism for lacking the consumer protections present with traditional credit cards.

The interpretive rule by the CFPB asserts that BNPL lenders must now adhere to guidelines similar to those of credit card providers. This includes offering consumers the ability to dispute charges and receive refunds for returned items. Furthermore, BNPL lenders must issue periodic billing statements, much like those seen for credit card accounts. These changes are set to take effect within 60 days.

While these regulations increase oversight, they do not require BNPL providers to verify borrowers’ repayment capability, a measure requested by consumer advocates. Analysts suggest that this omission shields the industry from the strictest regulations, which could have significantly impacted operations.

The BNPL industry has experienced remarkable growth, with the five largest providers issuing $24 billion in loans in 2021, a substantial rise from $2 billion in 2019. According to Bankrate, half of shoppers aged 25 to 44 utilize BNPL services, while Adobe Analytics predicts that BNPL could drive up to $84 billion in expenditures this year, a 13% increase from the previous year.

Despite their popularity, BNPL plans can come with significant fees for missed payments, raising concerns regarding consumer debt. Additionally, loans from BNPL firms like Affirm, Afterpay, Klarna, PayPal, and Zip are typically not reported on consumers’ credit reports or factored into their credit scores. This lack of transparency has sparked fears that users may accumulate excessive debt without notice from other lenders or regulators.

Nevertheless, 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, signaling a move towards increased transparency in the BNPL sector.