Buy Now, Pay Later (BNPL) services are now required to adopt practices reminiscent of those employed by traditional credit card providers.
This shift comes as the CFPB enforces regulations mandating BNPL companies to actively manage disputed purchases, process refunds, and furnish customers with monthly billing statements.
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Adopting Practices Similar to Credit Card Providers
Buy now, pay later (BNPL) services are now required to operate under guidelines similar to those governing credit card providers.
The Verge reported that the Consumer Financial Protection Bureau (CFPB) announced an interpretive rule that reclassifies BNPL services as credit card providers.
This means BNPL companies must now handle disputed purchases, issue refunds, and provide monthly billing statements. BNPL services allow customers to buy products and pay in interest-free installments.
The new rules mandate that these companies offer refunds for returned products or canceled services and send periodic billing statements to their users.
The CFPB's decision follows an investigation into BNPL services, which concluded that these services are frequently used as alternatives to traditional credit cards. The move aims to enhance consumer protection in the rapidly growing BNPL market.
BNPL Services' Responses
This announcement marks a significant advancement in the regulation of BNPL services, an area Klarna has long supported improving.
Despite this progress, Klarna expressed confusion over the CFPB's decision to classify BNPL services as equivalent to credit cards.
The company highlighted the crucial differences between interest-free BNPL offerings and credit cards, noting that credit card companies typically profit from high-interest payments that can trap customers in debt.
Klarna emphasized that its business model includes customer protections such as covering refunds, investigating disputes, and providing detailed purchase information.
The company hopes that the CFPB will recognize the major differences between BNPL and credit cards, as they operate in fundamentally different ways. Klarna's BNPL is short-term, with no interest credit and no fees when paid on time.
At Klarna, every transaction is underwritten to ensure lending only to consumers who can pay back, proven by global defaults of 1%.
This model provides consumers with a transparent and predictable repayment structure, making it easier to manage their finances without the burden of accumulating interest.
Affirm CEO Max Levchin expressed satisfaction with the CFPB's promotion of consistent industry standards, highlighting that many of these regulations already align with Affirm's existing practices.
He emphasized that the company is pleased to see formal recognition and enforcement of standards that Affirm has long adhered to, reinforcing their commitment to customer protection and transparency in the BNPL sector.
As credit card interest rates surge, BNPL services have gained significant popularity, even prompting Apple to launch its own BNPL offering.
However, concerns are emerging about the potential for BNPL services to encourage overspending and accumulation of debt.
According to a report from CNBC, the extent of consumer debt related to BNPL services remains unclear, as these companies are not required to report loans to credit reporting agencies.
