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Consumer watchdog classifies ‘buy now, pay later’ apps as credit cards

Rohit Chopra, director of the Consumer Financial Protection Bureau, listens during a Senate committee hearing on Dec. 15.  (Ting Shen/Bloomberg)
By Aaron Gregg and Jaclyn Peiser Bloomberg

The Consumer Financial Protection Bureau will classify “buy now, pay later” apps the same way it treats credit cards, a move intended to improve consumer protections, the agency announced Wednesday.

Buy now, pay later, or BNPL, apps allow payment in interest-free installments. The problem is that consumers often don’t know whether lenders will help when they need to return an item or cancel a booking, the CFPB says. As a remedy, it’s announcing a new rule, taking effect in 60 days, requiring lenders to investigate disputes and cover refunds.

Klarna, which has one of the best-known pay-later services, called the rule “a significant step forward,” saying it already operates at the standard set out by the CFPB.

But BNPL should not be treated like credit cards, the company said.

“It is baffling that the CFPB has overlooked the fundamental differences between interest-free BNPL and credit cards, whose whole business model is based on trapping customers into a cycle of paying sky-high interest rates month after month,” said Filippa Bolz, global communications lead at Klarna.

The rule explains that BNPL borrowers “are entitled to some of the same rights and protections of the truth and lending act that apply to traditional credit cards,” CFPB Director Rohit Chopra told the Washington Post ahead of the announcement.

BNPL apps such as Klarna, AfterPay and Affirm have proliferated in recent years as consumers seek new ways to juggle higher prices. They are typically linked to websites or mobile apps and charge transaction fees to merchants. Their popularity has spiked as consumers use them to stretch their budgets as grocery prices have soared, consumer debt hits record highs and interest rates remain elevated.

According to a report from the Federal Reserve, 14% of consumers used the service at some point last year – a two percentage-point increase from 2022. Of those shoppers, more than half said they needed it to afford the purchase.

The services are growing their market share of online purchases. Of the $331.6 billion Americans spent online during the first four months of this year, 8% – or $25.9 billion – was driven by BNPL, according to Adobe Analytics. This was an almost 12% increase over the same period last year.

The $309 billion industry is projected to swell more than 25% by 2026, according to analytics company GlobalData.

Some economists warn this category of consumer debt is hard to track since the law doesn’t require lenders to report it to oversight agencies – meaning the actual amount of consumer debt may be higher than policymakers think. The new rule doesn’t address this issue.

Avoiding a ‘runaround’

The CFPB’s new regulation fits into a broader push to tighten consumer protections. Under Chopra, the agency has moved to cap overdraft penalties at $8 and crack down on high-interest lenders, among other initiatives.

It started its BNPL investigation in 2021 and concluded in a 2022 market report that the apps are often used as a close substitute for credit cards – for example, being offered in stores alongside credit-card machines. It also found that more than 13% of BNPL transactions across the five firms it surveyed involved a return or dispute of some sort, counting $1.8 billion in disputed or returned transactions.

Affirm does have a dispute resolution process, for example, and the company says no payments are due while a dispute is being resolved. Klarna already investigates disputes, covers related refunds and provides purchase information, the company said. PayPal has an option to “dispute a transaction” for when the purchased item isn’t received, or when it is substantially different than advertised.

The CFPB believes many BNPL providers already are providing these services, but the new rule will enforce consistency in the marketplace, according to a person familiar with the matter who spoke on the condition of anonymity because they were not authorized to speak publicly on it.

However, in reviewing consumer complaints, the CFPB has seen a consistent trend of people “getting the runaround” from merchants when trying to get refunds, the person said.

“The failure to provide dispute protections can create chaos for consumers when they return their merchandise or encounter other billing difficulties,” the CFPB wrote in a Wednesday news release.

The new rule requires BNPL lenders to investigate disputes initiated by consumers and pause any payment requirements during the course of the investigation. It also requires lenders to refund returned products or canceled services and provide periodic billing statements similar to those from a credit card company.

“The CFPB wants to make sure that these new competitive offerings are not gaining an advantage by sidestepping the rights and responsibilities enshrined under the law,” Chopra said.

The financial services industry, meanwhile, has suggested it would welcome tighter regulation over BNPL.

In a 2022 letter, the American Bankers Association expressed concern that “the rapid growth of BNPL products offered by unregulated companies presents risks to consumers, merchants, and the integrity of the consumer credit market,” arguing that all companies offering those products should be regulated the same way.

The Consumer Bankers Association, another industry group, has similarly pushed for “modernize the rules of the road to reflect the modern banking landscape today,” saying technology companies that provide loan products aren’t held to the same standard as banks.