What the CFPB's New BNPL Rule Means for Merchants

The Consumer Financial Protection Bureau (CFPB) has issued a new interpretive rule that significantly affects Buy Now, Pay Later (BNPL) providers. This rule reclassifies BNPL providers as "card issuers" under Regulation Z, aligning them with traditional credit card providers. This change is a massive shakeup for the BNPL sector, and in addition to its requirements for providers, it will likely have a significant impact on merchants as well.

Overview of the New CFPB Interpretive Rule

The CFPB’s new interpretive rule redefines BNPL providers as "card issuers" under Regulation Z, the regulation that put into effect the changes mandated by the Truth in Lending Act. This classification imposes new regulatory requirements on BNPL providers, similar to those faced by credit card companies. The rule aims to enhance consumer protection by ensuring BNPL providers adhere to the same standards of transparency and dispute resolution as traditional credit card issuers. The rule becomes effective 60 days after its publication in the Federal Register, and public comments are being solicited until August 1 to refine and potentially revise the rule based on feedback.

Legal Framework and Regulatory Context

Since the mid-2010s, BNPL has emerged as a popular financing option, particularly among younger consumers and those with lower credit scores. BNPL services allow customers to split purchases into interest-free installments, providing an alternative to traditional credit cards. With the percentage of consumers that have used BNPL increasing to 9% in 2023, the CFPB took action under its mandate to protect consumers.

Created in 1968 after the passage of the Truth in Lending Act, Regulation Z was designed to protect consumers by ensuring clear disclosure of credit terms and providing mechanisms for resolving billing disputes. Under Regulation Z, creditors must provide borrowers with detailed information about the cost of credit, including annual percentage rates (APRs), fees, and other charges. This regulation also mandates standardized billing practices and dispute resolution processes, ensuring that consumers have recourse in the event of billing errors or fraudulent transactions.

The CFPB's new rule interprets digital user accounts used to access BNPL credit as "credit cards" under Regulation Z. This classification means BNPL providers must comply with the same requirements as traditional credit card issuers. This includes adherence to subpart B of Regulation Z, which covers billing error resolution and periodic statements, ensuring consumers receive detailed information about their credit use and have a means to dispute charges. Traditional BNPL products, which are typically short-term loans repaid in four or fewer installments without interest, are now seen through the same regulatory lens as credit cards, despite their structural differences.

Key Requirements for BNPL Providers

BNPL providers must now issue periodic statements and provide mechanisms for resolving billing disputes, akin to credit card companies. BNPL providers will need to establish systems to manage these new obligations, likely increasing operational costs. The periodic statements must detail the transactions made using the BNPL service, the outstanding balance, and the minimum payment due. Providers are also required to implement a formal dispute resolution process, enabling consumers to challenge unauthorized or incorrect charges, and must investigate and resolve these disputes in a timely manner.

However, BNPL providers are exempt from certain regulations, such as penalty fee limits and ability-to-repay requirements. These exclusions recognize the unique nature of BNPL products, which typically involve short-term, interest-free credit. For example, subpart G includes rules that apply to traditional credit card issuers regarding penalty fees for late payments and requirements to assess a borrower's ability to repay the credit extended. Since BNPL transactions are usually smaller and short-term, the regulatory burden of these specific provisions has been deemed unnecessary for BNPL providers.

Impact on Merchants

One significant part of this regulatory change is the requirement for BNPL providers to implement a process for customers to dispute charges, similar to credit card chargebacks. The costs associated with these disputes are likely to be passed on to merchants, potentially increasing their financial burden. Merchants whose customers make heavy use of BNPL must be prepared to handle an uptick in dispute-related expenses and ensure they have processes in place to manage these disputes effectively. Merchants might also need to review their contracts with BNPL providers to understand how the the terms and conditions might apply to this new situation.

Impact on BNPL Providers

BNPL providers will face increased compliance costs as they develop systems to meet the new regulatory requirements. Providers will need to implement systems capable of generating accurate and timely statements, tracking disputes, and ensuring that all regulatory requirements are met. Additionally, they may need to hire or train compliance officers to oversee these processes and ensure adherence to the new rules.

The new rule could reshape the competitive landscape of the BNPL market. Larger, more established BNPL providers may find it easier to absorb the additional compliance costs, potentially gaining a competitive advantage over smaller players. This might lead to further consolidation in the BNPL industry as smaller providers struggle to keep up with regulatory demands.

Larger providers with more resources can invest in advanced compliance systems and absorb the costs associated with dispute resolution more easily, while smaller providers may find it challenging to meet these new requirements without significant financial strain. As a result, we might see a shift in market share towards larger BNPL providers, potentially reducing competition and innovation in the sector.

Future Outlook and Industry Response

The CFPB is collecting public comments on the interpretive rule and may revise it based on industry feedback. Stakeholders, including merchants and BNPL providers, are encouraged to participate in this process to ensure their perspectives are considered. By providing detailed feedback, stakeholders can help shape the final version of the rule to better reflect the practical realities of the BNPL market and ensure that it achieves its intended consumer protection goals without stifling innovation or growth.

In the long term, this interpretive rule could lead to more standardized practices within the BNPL industry, benefiting consumers through enhanced protections and clearer credit terms. As the BNPL industry adapts to these new regulations, we might see a shift towards more transparent and consumer-friendly practices, such as improved disclosure of terms and conditions and more robust dispute resolution processes. However, the cost of compliance may lead some smaller providers to exit the market or scale back their offerings, potentially reducing the diversity of BNPL options available to consumers.

Regulatory clarity and consumer protection are crucial in the rapidly evolving BNPL market. By working together, the industry can ensure that BNPL remains a viable and beneficial option for consumers while maintaining high standards of consumer protection.