The Consumer Financial Protection Bureau has issued a new rule that requires buy now, pay later companies to provide consumers with the same legal rights and protections as credit card lenders. This includes the right to demand a refund and dispute transactions. The agency began an inquiry into the short-term lending industry two years ago, responding to ongoing consumer complaints. Buy now, pay later loans are typically marketed as zero-interest or low interest options that allow consumers to spread out payments for purchases over time. These services are commonly used for big-ticket items like furniture, clothes, and airline tickets.
According to a report from the CFPB, more than 13% of buy now, pay later transactions involved a return or dispute in 2021, totaling $1.8 billion in disputed or returned transactions at the five companies surveyed. CFPB Director Rohit Chopra emphasized that consumers are entitled to important consumer protections regardless of whether they use a credit card or a buy now, pay later service. Two major players in the buy now, pay later industry, Affirm and Klarna, have welcomed the new regulation. Affirm currently offers dispute and error resolution assistance, while Klarna investigates consumer disputes and provides refunds.
While some in the industry have voluntarily chosen to operate at the standard now mandated by the CFPB’s rule, there are still significant differences between credit card lending and buy now, pay later loans. For example, not all buy now, pay later lenders report their loans to the three major credit bureaus, leading to potential issues of overextension and debt management for consumers. The new rule requires buy now, pay later lenders to extend similar rights and protections as classic credit card providers, including investigating disputes, providing refunds for returned products or canceled services, and issuing billing statements to consumers.
The CFPB has emphasized the importance of providing dispute protections to consumers, stating that failing to do so can create chaos for consumers when they encounter billing difficulties or return merchandise. The agency’s new rule aims to ensure that consumers using buy now, pay later services have access to the same level of protection and transparency as those using traditional credit cards. The announcement of this new regulation is seen as a significant step forward in regulating the buy now, pay later industry by both consumers and industry players alike. The Associated Press receives support from the Charles Schwab Foundation for financial literacy reporting.
