‘Buy now, pay later’ apps are now considered credit cards

The Consumer Financial Protection Bureau (CFPB) has just declared that “buy now, pay later” is subject to credit card rules—a move intended to protect consumers from predatory lending practices.

Just like credit cards, BNPL apps, including Klarna, Afterpay, and Affirm, will be required to investigate disputes and cover refunds when customers return items or cancel a booking.

The rules will go into effect in 60 days.

CFPD director Rohit Chopra said the new guidelines ensure that BNPL users receive “some of the same rights and protections of the Truth in Lending Act that apply to traditional credit cards.”

Enacted in 1968, the Truth and Lending Act regulates certain credit card activities and gives Americans the right to cancel certain transactions.

Until now, the rapidly growing BNPL market has been largely unregulated, feeding off Americans’ insatiable appetite for more credit.

According to Adobe Analytics, BNPL loans accounted for 8% of U.S. online sales in the first four months of the year, amounting to $25.9 billion.

Currently valued at $309 billion, the BNPL industry is forecast to grow by more than 25% in the next two years, according to GlobalData.

Although many BNPL loans offer free credit so long as the borrower pays off their balance on time, regulators say these programs take advantage of “financially fragile” Americans.

Buy now, pain later?

According to research by the New York Fed, there’s a strong correlation between poverty and BNPL usage.

The New York Fed’s SCE Credit Access Survey found that financially insecure Americans are up to three times more likely to take out BNPL loans than their financially stable peers.

Among BNPL users, 62% of respondents in the survey said they’ve had to cut expenses to pay their bills over the past year, compared to only 38% among non-BNPL users.

Meanwhile, 61% of BNPL users said they paid off less than their full balance on their credit card bill, compared to only 32% of non-BNPL users.

“It is rare for people to use BNPL just once,” the Fed researchers wrote. “This suggests that high-frequency use may grow if the product continues to be adopted by financially fragile households.”

Unfortunately, BNPL loans have become just another way for credit-addicted Americans to spend more.

“I’m sure there are people who use it well, but on average, we feel it kind of replaces the credit card,” Ben Lourie, an accounting professor at the University of California, Irvine, told NBC News. “People are consuming extra. There’s just no way around it.”