The Consumer Financial Protection Bureau (CFPB) has issued an interpretive rule confirming that BNPL lenders are credit card providers.

Accordingly, BNPL lenders must provide consumers some key legal protections and rights that apply to conventional credit cards. These include a right to dispute charges. It also includes demanding a refund from the lender after returning a product purchased with a BNPL loan. The CFPB launched its inquiry into the rapidly expanding BNPL market more than two years ago. It continues to see consumer complaints related to refunds and disputed transactions. The CFPB says this action will help bring consistency to the market.

BNPL users entitled to consumer protection under existing laws

“When consumers 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,” said CFPB Director Rohit Chopra. “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 Buy Now, Pay Later market has expanded rapidly over the past few years. Lenders advertise buying products over four simple payments. Products are marketed as a way to help consumers pay for expensive products and services over time without having to pay interest. Today, both products, like televisions and gaming systems, and services, like airline tickets and cruises, can be purchased through Buy Now, Pay Later products. Buy Now, Pay Later products are popular across ages, races, and income levels.

The CFPB began studying the Buy Now, Pay Later industry in 2021. The CFPB found that Buy Now, Pay Later is often used as a close substitute for conventional credit cards to purchase goods and services. When people go to check out online or in person at a store, Buy Now, Pay Later is frequently offered as an option alongside the option to pay with a credit card. Just as credit cards can be used in a variety of situations, and not just in-person with a swipe or tap, Buy Now, Pay Later products are used via digital user accounts linked to websites, mobile apps, browser extensions, or integrations with merchant websites or mobile apps.

Over 13% of BNPL transactions involve a return or a dispute: CFPB

Like conventional credit cards, Buy Now, Pay Later combines payment processing and credit services, while charging transaction fees to merchants.

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In a market report, the CFPB revealed that over 13% of BNPL transactions involved a return or dispute. In 2021, people disputed or returned $1.8bn in transactions at the five firms surveyed. Failure to provide dispute protections can create chaos for consumers when they return their merchandise or encounter other billing difficulties.

The CFPB says that BNPL lenders meet the criteria for credit card providers under the Truth in Lending Act.

Buy Now, Pay Later lenders obligations

  • Investigate disputes: Buy Now, Pay Later 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 servicesWhen consumers return products or cancel services for a refund, Buy Now, Pay Later 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.

In 2021, the CFPB opened an inquiry into BNPL with a focus on debt accumulation, regulatory arbitrage, and data harvesting. The agency published its results in 2022, and highlighted the rapid expansion of the industry and growing consumer risks. Last year, the CFPB published its findings on the financial profiles of Buy Now, Pay Later borrowers.

Impact of regulation on the BNPL sector

The BNPL outfits cannot say they have not been warned that regulation was on the way. Local regulations in New Mexico have already resulted in Klarna and Afterpay withdrawing their services in the state. The BNPL firms initially spun the dubious line that the credit card was a broken product and they were the only ones who could fix it. Now, the regulator has determined that BNPL ought to be treated in the same way as credit cards. As an added irony, BNPL outfits such as Klarna, Zip and Afterpay have launched their own credit card and debit card style products.

Some of the most ill-fated sector M&A deals of recent years involve the BNPL sector. In August 2021, Block announced plans to acquire the perennially loss-making Afterpay for a whopping $29bn. By the time the deal closed, the Block share price had fallen to the extent that the Afterpay acquisition was valued at $13.9bn. Since August 2021, the Block share price has fallen by 73%.

Affirm statement

A spokesperson for Affirm told RBI: “We are encouraged that the CFPB is promoting consistent industry standards, many of which already reflect how Affirm operates, to provide greater choice and transparency for consumers. Affirm’s success is aligned with responsibly extending access to credit as we do not charge late or hidden fees.

“We underwrite every transaction, provide consistent and transparent disclosures, and offer dispute and error resolution assistance. We urge other companies that offer buy now, pay later products to live up to the industry’s promise to provide consumers with a more flexible and transparent alternative to other payment options.

“We are committed to continuing to engage with the CFPB as we constantly improve the experience and value we deliver to consumers, as well as our practices.”

The Affirm Holdings share price is down by 4% today. For the year to date, it is down by 34% and has dropped by 80% since peaking in the fourth quarter of 2021.

BNPL profit centre: ‘centred on user success’

One can now expect to hear claims from lobbyists acting for the BNPL sector that their products differ from credit cards. A common theme is that the BNPL outfits profit model is centred on user success. There is a final irony here: few BNPL outfits have ever turned a profit.

Splitit was listed on the ASX until last year. At the time trading in Splitit was halted, its share price had dropped by 90% since it peaked in 2020. Four months after revealing plans to delist, Splitit announced that had taken the company private. It raised $50m and relocated to the Cayman Islands.