Buy Now, Pay Later Needs Credit Card-Like Oversight, CFPB Says

Buy now, pay later lenders such as Block Inc.’s Afterpay, Affirm Holdings Inc. and Klarna Bank AB should be treated in some ways like credit-card providers, according to one US financial regulator.

The US Consumer Financial Protection Bureau published a new interpretation of existing laws and regulations on Wednesday to make clear that, like credit-card providers, BNPL firms must investigate disputes, refund returned products or voided services, and provide billing statements.

CFPB Director Rohit Chopra

Photographer: Tierney L. Cross/Bloomberg

That means BNPL companies should be treated more like those that offer credit cards, but not entirely: The CFPB didn’t interpret the existing framework to say that BNPL firms have to assess whether a consumer has the ability to repay their short-term installment loans.

“When Congress defined credit cards, it included devices both known and unknown,” CFPB Director Rohit Chopra said on a call with journalists. “While we think of a credit card as a piece of plastic, it encompasses a wide array of devices, including digital forms of credit payments.”

Chopra said the BNPL industry is now a major part of the consumer credit market that offers meaningful alternatives to other credit options. “We want to make sure they are not gaining an advantage by sidestepping existing regulations,” he said.

The CFPB’s interpretation of the law will take effect in 60 days.

The Financial Technology Association, a trade group for major BNPL companies, said in a statement that the industry is “committed to strong consumer protections,” but argued that its products are different than traditional credit cards.

“These products have zero interest on outstanding balances, no ability to revolve a balance, and a profit model centered on user success,” Penny Lee, the group’s chief executive officer, said. “We 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.”

Buy now, pay later firms exploded in popularity with the exponential growth of e-commerce during the pandemic, and have stuck around since, expanding their offerings and growing in scale. The consumer protection agency’s announcement is a first public crack at fitting BNPL companies into the existing regulatory framework, and follows a September 2022 report on the industry.

Unlike the credit-card industry, where big banks and other card issuers are subject to direct CFPB supervision, most large buy now, pay later companies don’t get regular visits from the agency. At least one exception is Affirm, which has said it’s subject to supervision by the CFPB. That means agency examiners will be able to determine whether it’s running afoul of existing credit-card rules applicable to BNPL companies.

The CFPB will be soliciting comments on whether further clarification is needed, but agency officials said they aren’t in the process of actively producing new rules to regulate BNPL firms. Other regulators including the Office of the Comptroller of the Currency have previously warned of risks associated with buy now, pay later lending.

Read More: Americans Are Racking Up ‘Phantom Debt’ Wall Street Can’t Track

With more consumers turning to alternative payment methods, major financial institutions have also jumped into the fray, including PayPal Holdings Inc., US Bancorp and Citizens Financial Group Inc. Big banks including Citigroup Inc. and JPMorgan Chase & Co. also offer pay-over-time offerings on their credit cards.

(Updates with comments from BNPL industry trade group starting in seventh paragraph.)

--With assistance from Evan Weinberger.

To contact the reporters on this story:
Paige Smith in New York at psmith494@bloomberg.net;
Paulina Cachero in New York at pcachero@bloomberg.net

To contact the editors responsible for this story:
Sally Bakewell at sbakewell1@bloomberg.net

Steve Dickson

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