Consumer watchdog to regulate ‘buy now, pay later’ lenders as credit cards

The government’s consumer watchdog moved Wednesday to classify popular “buy now, pay later” applications as credit cards, which would extend customer protections to millions of users, including the ability to dispute charges and request refunds.

“Buy now, pay later” programs, also known as BNPL, allow consumers to pay for products in interest-free installments. Companies that offer such services include Affirm, Klarna and PayPal.

The Consumer Financial Protection Bureau (CFPB) began looking into BNPL programs in 2021 amid the market’s rapid expansion and concerns about mounting debt and their use of consumer data.

A 2022 CFPB market analysis found BNPL exploded during the pandemic, with five firms making 180 million loans totaling more than $24 billion in 2021, almost a tenfold increase from 2019. More than 13 percent of BNPL transactions involved a return, the report found, with consumers disputing or returning $1.8 billion in transactions across the five companies.

“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. 

“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 CFPB says the move will bring “consistency” to the market. It’s slated to take effect 60 days after it’s published in the Federal Register.

In a statement, Affirm said it was “encouraged” by the CFPB move to promote “consistent industry standards.”

“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,” Affirm said in a statement.

But Klarna said it was “baffling that the CFPB fails to acknowledge the fundamental differences between BNPL and credit cards.”

“Trying to regulate BNPL like a credit card is like comparing apples with oranges,” Klarna said in a statement, arguing the new rule will not help bring down consumer credit card debt.

Penny Lee, president and CEO of the Financial Technology Association, which represents fintech industry and BNPL companies including Block/Afterpay, Klarna, PayPal, and Zip, said its members “are committed to strong consumer protections, including for disputes and refunds,” but also argued “BNPL products are fundamentally different from credit cards.

“These products have zero interest on outstanding balances, no ability to revolve a balance, and a profit model centered on user success. 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,” Lee said.

Total U.S. credit card debt hit $1.13 trillion during the fourth quarter of 2023, the highest balance since at least 2003, according to the latest report from the New York Federal Reserve.

But Chopra said BNPL is now “a major part of the consumer credit market” and that the rule is intended to clarify laws and regulations governing BNPL.

The agency is accepting comments until Aug. 1.

“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,” Chopra said.

Updated at 1:12 p.m. EDT