'Buy now, pay later' lenders must now offer the same dispute protections as credit cards

The Consumer Financial Protection Bureau (CFPB) announced Wednesday that it will now treat BNPL loans like credit cards, meaning lenders must provide specific consumer protections.

Under the new rules, which take effect in 60 days, lenders must investigate disputes, issue refunds, and provide billing statements.

“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,” said CFPB Director Rohit Chopra.

BNPL services offer consumers a convenient way to break up their purchases into smaller amounts with typically no interest.

BNPL users spent over $46 billion between January and August in 2023, an increase of 14.7% year-over-year, according to Adobe Analytics.

However, this rapid growth has turned the industry into a regulatory Wild West with inconsistent consumer protections.

According to the CFPB, in 2021, $1.8 billion worth of transactions across five BNPL firms were involved in disputes or returns.

“When consumers check out and choose Buy Now, Pay Later, they don’t know if they will get a refund if they return their product or whether the lender will help them if they didn’t get what was promised,” said Chopra.

While many BNPL providers have policies for disputes and refunds, the CFPB argues the new rules will provide more consistency across the industry and give consumers a clearer understanding of their rights.

BNPL lenders support the move, but make one distinction

The Financial Technology Association (FTA), a trade group representing companies like Afterpay, Klarna, PayPal, and Zip, issued a statement saying they are “committed to industry best practices that prioritize consumer well-being and success.”

However, they dispute the CFPB's categorization of their services as equivalent to credit cards.

“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,” said Penny Lee, President and CEO of the FTA.

They 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.

While industry leaders position themselves as an alternative to high-interest credit card debt, critics argue BNPL services lead to an accumulation of debt for many Americans feeling squeezed by higher prices.

The FTA argues that only 2% of the BNPL loans from the companies they represent go delinquent. However, another study found that nearly half of BNPL loans go delinquent.