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Editor's Choice North America Regtech

US Consumer Watchdog Decision Offers BNPL Users Credit Card-Level Protections

The Consumer Financial Protection Bureau (CFPB), a US government agency responsible for protecting consumers in the financial sector, has ruled that buy now, pay later (BNPL) lenders must treat consumers as credit card providers do, ensuring they receive the same key protections.

This decision mandates that BNPL users will now have the right to dispute charges and obtain refunds for returned products, aligning BNPL services with the consumer safeguards traditionally associated with credit cards.

The CFPB, which launched an inquiry in to the BNPL market more than two years ago, says it continues to see consumer complaints related to refunds and disputed transactions. Its report into the market in 2022, revealed that more than 13 per cent of BNPL transactions involved a return or dispute. In 2021, people disputed or returned $1.8billion in transactions at five firms surveyed.

Rohit Chopra, director at CFPB,
Rohit Chopra, director at CFPB,

Rohit Chopra, director at CFPB, commented: “When consumers check out and choose BNPL, 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.

“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.”

The new rule

The CFPB’s interpretive rule describes how BNPL lenders meet the criteria for credit card providers, under the Truth in Lending Act. For consumers, this means BNPL lenders must:

  • Investigate disputes: BNPL lenders must investigate disputes that consumers initiate. Lenders must also pause payment requirements during the investigation and sometimes must issue credits. – Refund returned products or cancelled services: When consumers return products or cancel services for a refund, BNPL lenders must credit the refunds to consumers’ accounts.
  • Provide billing statements: Consumers must receive periodic billing statements like the ones received for classic credit card accounts.
“Better protection”
Ariana-Michele Moore
Ariana-Michele Moore, Datos Insights

Ariana-Michele Moore, advisor, retail banking and payments at advisory firm Datos Insights, welcomes the development, commenting that “returns have been the bane for many BNPL users”.

 “For a while folks have sat back wondering how BNPL would play out. A lot of legitimately good questions have been raised: Do consumers understand the terms and conditions? Will BNPL increase the consumer debt burden? Are consumers protected? Is BNPL a risk to the financial system (due to the lack of reporting to credit bureaus)?

“Regulators usually like to sit back and see how the market will play out. Will it correct itself? Will banks regulate themselves? So in a way, it’s interesting when a regulator HAS to step in. That alone is a statement. And it’s about time the BNPL industry is held to a standard the rest of the credit industry must abide by.

“Not only will consumers be better protected, it could force a level playing field across payment options and spur competition.”

“Vital clarity”
Phil Goldfeder, chief executive officer at the American Fintech Council
Phil Goldfeder, chief executive officer at the American Fintech Council

American Fintech Council (AFC) CEO Phil Goldfeder says the member association is “encouraged” by the CFPB’s approach and says the interpretive rule provides vital clarity for companies offering responsible BNPL products.

He commented: “The Rule recognises the benefits that responsible BNPL providers offer but more importantly provides consistent industry standards to promote greater choice and transparency for consumers utilising responsible BNPL products.

“As part of its mission to promote affordable, responsible and transparent financial products, AFC developed and adopted specific policy standards for the provision of BNPL products, including classifying products as loans, ensuring transparent terms, underwriting every transaction at the point of sale, providing consumers all disclosures required by the Truth in Lending Act (TILA), and working with credit bureaus to improve reporting standards to create safe pathways out of debt.

“AFC members offering BNPL loans already voluntarily comply with provisions enumerated by the CFPB and we urge all companies offering BNPL products to embrace responsible industry standards.”

“We are encouraged by the work the CFPB has done to better understand the buy now, pay later industry. We look forward to continuing to work with the CFPB, and all of our stakeholders to promote innovation that responsibly extends access to credit while ensuring that consumers benefit from consistent standards across BNPL.”

What’s next?

The CFPB is seeking public feedback on the new interpretive rule until 1 August 2024.

Chopra adds: “Given the growth in outstanding consumer credit and the rise in new forms of credit, the CFPB will continue to carefully monitor these markets and take action to ensure that consumers are treated fairly.

“BNPL is now a major part of the consumer credit market, as these loans provide a meaningful alternative to other options for consumers. However, the CFPB wants to ensure that these new competitive offerings are not gaining an advantage by sidestepping the longstanding rights and responsibilities enshrined under the law.”


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