TThe Consumer Financial Protection Bureau (CFPB) issued a new interpretive rule on Wednesday that would provide customers using buy now, pay later (BNPL) greater protections that would normally apply to credit cards.
BNPL – which has multiple variations and is offered by companies such as Affirm, Klarna and Afterpay – allows customers to cover costs in four interest free biweekly payments. Consumers typically need to pay about 25% of the product’s cost to initially purchase it, although the percentage and number of payments made can vary.
The service is becoming increasingly popular: one in five BNPL customers say they prefer BNPL over other forms of payment, such as cash, credit or debit cards, according to Afterpay. Over the next three years, the BNPL payment amount will be expected to achieve almost US$125 billion.
According to the interpretative rule, although the BNPL is not a credit card, “it fits the description of credit products that was already provided for in credit card regulation”, explains Ed deHaan, professor at the Stanford Graduate School of Business. This means that companies offering BNPL will have to provide consumers with quick refunds for items that have been returned, provide regular invoice statements, clearer disclosures, and suspend payments on charges that are being disputed.
“When consumers check out and choose Buy Now, Pay Later, they don’t know if they will receive a refund if they return the product or if the creditor will help them if they don’t receive what they were promised,” said the CFPB director. Rohit Chopra in a Wednesday’s statement. “Whether a shopper swipes a credit card or uses Buy Now, Pay Later, they are entitled to important consumer protections under long-standing laws and regulations already in effect.”
DeHaan says the average BNPL user won’t notice a significant difference, although this should give customers more confidence when using the service. “Regulations really kick in when something goes wrong,” he says. “In those annoying cases where you have a dispute – you buy something online, the product doesn’t show up, you email customer service and they don’t respond. Now, they will.”
However, deHaan notes that BNPL will not yet be required to report to credit bureaus. BNPL already allows people to use its service without checking their traditional credit scores, opening the service to people who may have been prevented from opening a credit card. “[Research] in fact, finds that the average user starts to have pretty immediate indicators of financial hardship after using BNPL for the first time,” says deHaan, referencing a report He wrote.
The new regulations are not entirely concrete. The changes won’t be seen for at least another two months, and the CFPB has opened the interpretive rule to comments, which will be accepted until August 1.
Klarna, which offers BNPL, said in a statement of May 22 that while the new guidance “does not require any major changes to Klarna’s business,” it is “disconcerting” that the CFPB has not recognized the key differences between BNPL and credit cards.
This story originally appeared on Time.com read the full story
