Federal rules expanded to protect shoppers who buy now, pay later

Regulators are playing catch up with the burgeoning "buy now, pay later" business.

Providers of the increasingly popular point-of-sale loans must now offer some of the same protections afforded to credit card users, including the right to dispute charges and demand refunds for returned purchases, the Consumer Financial Protection Bureau announced on Wednesday.

The White House applauded the move, calling it part of a broader "crack down on corporate rip-offs." 

"The Biden-Harris Administration will continue to take action to protect consumers and keep more money in Americans' pockets," Jon Donenberg, a deputy director with President Biden's National Economic Council, said in an emailed statement Wednesday.

The agency, which protects consumers from financial abuse, is taking the step in response to customer complaints of getting the runaround from pay-later providers when disputing a charge or attempting to return items, CFPB officials said at a press briefing on Tuesday. 

Welcomed by shoppers as an interest-free way to make purchases, from clothing to travel, the loans let borrowers pay over time, usually in four installments over six weeks. Usage of the loans surged during the pandemic, helping to drive an online shopping boom, the CFPB noted.

Similar to credit cards

An interpretive rule issued by the agency states that BNPL lenders are effectively credit card providers and so must provide consumers with basic protections that come with buying things with plastic.

"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," CFPB Director Rohit Chopra said in a statement. "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."

Additionally, BNPL lenders will have to provide users with periodic billing statements akin to those issued for traditional credit card accounts, according to the interpretive rule, which becomes effective in 60 days, the agency said.

Under the new rules, BNPL lenders must now:

• Investigate disputes initiated by consumers, pausing payment requirements during the process.
• Refund returned products or canceled services to consumers' accounts.
• Provide consumers with periodic billing statements like the ones received for standard credit cards. 

Although BNPL lenders will face tighter government oversight, the new CFPB rule doesn't require providers to verify that borrowers are able to repay the loans, as consumer advocates have called for.

"We believe this interpretative rule largely spares the industry from the most onerous requirement, which would be having to subject borrowers to an ability-to-repay test. On that front, it is a win," Jaret Seiberg, an analyst with TD Cowen Washington Research Group, said in a report.

Conversely, consumers remain vulnerable to an industry that includes some companies that aren't transparent about their business model, according to U.S. PIRG Education Fund.

"We're particularly concerned about younger people, who are the key target demographic for BNPL plans and are encouraged to buy stuff they don't need and can't afford. They often don't understand what they're getting themselves into because the disclosures are vague. This needs to change," Teresa Murray, U.S. PIRG's consumer watchdog, said on Wednesday in an emailed statement. 

Risk of piling on debt

Buy now, pay later is increasingly offered as an option alongside paying with a credit card, with the industry's five biggest players generating $24 billion in loans in 2021 — a more than 10-fold increase from $2 billion in 2019, according to the CFPB.

Half of shoppers 25 to 44 years of age use BNPL, according to Bankrate. The option could drive as much as $84 billion in spending, up 13% from last year, according to Adobe Analytics.  

But BNPL plans can include hefty fees for those who miss payments, Consumer Reports cautioned last year. 

The loans offered by companies including Affirm, Afterpay, Klarna, PayPal and Zip are not typically reported on consumers' credit reports, nor are they reflected in consumer credit scores. That's led to concerns that users might be taking on too much debt that is not transparent to other lenders or regulators.  

Apple bucked that trend in announcing in February that it would report loans made through its Apple Pay Later program to Experian, one of the credit bureaus.