BNPL purchases should have the same protections as credit card purchases
WASHINGTON – Under an interpretive rule issued by the Consumer Financial Protection Bureau (CFPB) in May, Buy Now, Pay Later (BNPL) accounts are considered credit cards, and BNPL companies must provide borrowers with the right to dispute charges and get refunds, in addition to clear account opening disclosures and periodic billing statements. In a comment letter filed with the CFPB today, Consumer Reports and the National Consumer Law Center, on behalf of its low-income clients, offered strong support for the rule and urged the Bureau to extend additional protections to BNPL users that currently only apply to credit card purchases.
NCLC and Consumer Reports also joined a shorter comment submitted by a coalition of 90 consumer and civil rights groups.
“The CFPB’s new rule will help ensure consumers who use BNPL credit can dispute charges and get their money back promptly just as they are guaranteed by law when they use a credit card,” said Jennifer Chien, senior policy counsel at Consumer Reports. “Unfortunately, BNPL credit still lacks a number of critical consumer protections that put borrowers at risk. The CFPB should strengthen the rules governing the largely unregulated BNPL market and ensure consumers get the same protections they are entitled to with a credit card.”
BNPL credit is a fast-growing form of lending that enables consumers to split the cost of purchases into four or more payments. The most common BNPL credit involves “pay-in-four” purchases, where consumers pay 25 percent of the cost of the item at the point of sale, and the remaining balance in three payments of 25 percent over the next six weeks. Once they establish a BNPL account, consumers can use that account repeatedly to make additional purchases, just as they can with a credit card.
“Buy Now, Pay Later accounts are a form of credit card because they can be used for purchases at the point-of-sale, and Congress intended credit card protections to apply broadly to protect consumers,” said Lauren Saunders, associate director of the National Consumer Law Center. “In addition to responding to consumer disputes, BNPL companies should provide clear, uniform fee disclosures, extend credit that consumers can afford to repay, and charge only reasonable late fees, just as protections required for traditional credit cards.”
While many consumers report positive experiences with BNPL credit, complaints to the CFPB about the challenges borrowers face getting timely assistance with returns and refunds have risen steeply in recent years, and data also increasingly show that consumers are getting into unaffordable debt with BNPL credit.
Consumers often get the runaround between the merchant and the lender when they are unhappy with a purchase and can find themselves on the hook for payments when filing disputes, which can take weeks to resolve. With credit cards, a consumer can simply alert the credit card company and stop payment if it hasn’t already been credited. Consumers can also easily lose track of when payments are due, particularly if they have multiple outstanding BNPL loans. By contrast, credit card providers must issue regular statements that help consumers keep track of upcoming payments.
Consumers who are struggling with their finances are more likely to use BNPL. A December 2022 nationally representative Consumer Reports survey of 2,017 U.S. adults found that, compared with non-users, BNPL users were much more likely to have cut expenses to pay their bills and feel like they have more debt than they can handle.
Last year, CR published an evaluation of BNPL apps that found that users can end up paying penalty fees if they fall behind on payments or misunderstand the terms of the loan they’ve been offered. Because BNPL loans are so fast and easy to get, this can lure consumers into making impulse purchases and taking out more loans than they can manage.
In the letter to the CFPB, Consumer Reports and NCLC urged the Bureau to clarify that current law entitles BNPL users to additional protections already afforded to credit card users:
Clear disclosure of fees and charges before account opening: Some BNPL lenders charge a variety of fees, including late fees, account reactivation fees, rescheduling fees, and convenience fees when using credit or debit cards for a scheduled payment. BNPL providers should be required to clearly disclose all fees and charges up front in the standard “Schumer box” in all applications and solicitations before consumers open accounts. Clear fee disclosures will promote fair competition and help consumers find the most affordable option.
Ability to repay: Research has consistently shown that BNPL borrowers are more financially vulnerable compared with non-users and tend to have lower savings and liquidity, lower credit scores, and more signs of financial stress. However, BNPL lenders do not engage in thorough underwriting before allowing consumers to take out a loan. BNPL lenders should be required to assess a consumer’s ability to repay.
Limit penalty fees: BNPL lenders should not be allowed to use penalty fees as a back-end profit center that borrowers who are struggling financially cannot afford. BNPL lenders should be subject to the requirement imposed on credit cards that penalty fees be limited to reasonable and proportional amounts linked to the provider’s actual costs.
Credit reporting: Most BNPL lenders do not appear to furnish regular account information to the nationwide consumer reporting agencies. The CFPB should ensure that any reporting of BNPL credit is done in a manner that benefits consumers who pay on time by encouraging providers to report the loan as open-ended credit. Reporting BNPL as open-ended, revolving credit is the best way to enable consumers to use these loans to establish and build positive credit histories and strong credit scores.
Expanding supervision of BNPL lenders: Federal supervision of BNPL lenders is needed to ensure they are not engaging in deceptive or abusive practices and violating fair lending laws. But unless the BNPL lender is a bank or credit union, it is currently not subject to federal supervision. The CFPB should initiate a rulemaking defining the larger participants in the BNPL, installment loan, and line of credit markets in order to establish appropriate supervision of these lenders.
For a more detailed explanation of some of the risks posed by BNPL loans and the additional safeguards Consumer Reports and NCLC are urging the CFPB to adopt, see the groups’ comment letter to the Bureau.
Michael McCauley, Consumer Reports, michael.mccauley@consumer.org; Stephen Rouzer, National Consumer Law Center, srouzer@nclc.org