In recent years, it has been impossible not to see a buy now pay later (“BNPL”) option when shopping online or even in-store.
This popular option allows consumers to purchase products without having to pay the full amount upfront, with payments often broken out over four semi-monthly cycles. These payment models are often broken into four payments in alignment with bi-weekly or semi-monthly salary payment schedules, which most American households are subject to and are at an initial 0% interest rate. Popular types of BNPL lending platforms that most are familiar with include Klarna, AfterPay, and Affirm.
These types of platforms are closely tied to the Fintech industry, as the technology platforms that are utilized by these lenders directly impact the way consumers purchase items. The Fintech industry has a responsibility to consumers when developing these platforms to consider consumer protection and ensure consumers fully understand the implications of these alternate payment structures.
CFPB Ruling on Buy Now, Pay Later Services
With its rising popularity, the Consumer Financial Protection Bureau (“CFPB”), the independent government agency of the United States government, has taken an interest in the BNPL industry. In May 2024, the CFPB issued an interpretative rule stating that the BNPL lenders are a form of credit card provider. This was finalized effective September 2024 by the CFPB issuing FAQ’s in correlation to Regulation Z that directly connect the respective regulation to the BNPL interpretative rule. The conclusion is based on the premise that both BNPL and credit cards offer the same flexibility to a consumer on future payment for an acquired product or service and are, therefore, required to meet the same criteria under existing law and regulations as traditional credit cards.
Under the Truth in Lending Act (“TILA”), these lenders have to provide the following protections to consumers:
- BNPL lenders are required to investigate consumer-initiated disputes for charges, which includes scheduled payments being paused until the investigation into the dispute is settled.
- When a consumer returns a product or cancels a service, the BNPL lender is required to refund the consumer directly to their accounts.
- Billing statements must be issued to consumers on a periodic basis.
Members of The Financial Technology Association, such as Klarna, provided pushback on the recent ruling and have clarified how the structure operates differently from a credit card. The focus is on the fact that BNPL providers don’t charge interest on outstanding balances, balances cannot be forgiven, and the center of the product revolves around customer success. They argue that this business model significantly differs from credit cards, which generate income based on high consumer fees and revolving debt balances.
The ruling has essentially determined that BNPL Fintech companies and banking institutions operate in the same manner and that their separate payment schedule offerings to consumers on should be evaluated the same way. They are both competing for the same consumer demographic and are driven by financing volume.
It’s worth noting that before this CFPB rule was announced, the BNPL industry was already expanding beyond its traditional pay in four structures, including longer-term financing structures that include a component of interest expense. This creates more opportunities for consumers to take on extended payment terms, which lean closer to a traditional loan offered by banks. However, this type of financing does not show up as debt with credit score agencies, which hones in on CFPB’s concern that consumers are overextending themselves.
Key Takeaways
The CFPB rule has now created a higher barrier to entry for Fintech companies looking to enter the BNPL space. The Fintech companies operating in this space will now be subject to additional compliance requirements and held to a higher standard in line with the banking industry. However, it should be noted that it’s unlikely any retrospective enforcement will take place for non-compliance with regulations as the ruling was immediately effective on July 3, 2024, as long as the BNPL companies act in good faith to ensure compliance going forward. The implementation of the rule is not expected to impact financial reporting, however, we recommend that companies operating in the BNPL space work closely with their legal counsel to assess the impact of these regulatory changes.
Author: Anne Louise Brand, CPA | [email protected]
Contact Us
For more information on this topic, please contact a member of Withum’s Fintech Services Team.
