Buy-now-pay-later will be regulated like credit cards under new Biden rule. Here's how that will affect shoppers.

Andrew Keshner

14% of people last year said they used buy-now-pay-later loans, new research says

The growing number of people who use buy-now-pay-later loans are poised to receive stronger protections when they want their money back, the Consumer Financial Protection Bureau said Wednesday.

The federal consumer watchdog is treating buy-now-pay-later lenders as credit-card providers - and, therefore, these lenders need to investigate disputed purchases and refund money on returned products and canceled services, just like credit-card issuers do, the agency said.

The announcement "means that consumers should receive disclosures that lay out fees, pricing structures, and rights and protections for things like billing disputes and refunds," CFPB Director Rohit Chopra said. "For billing disputes, consumers have recourse when the merchant gives them the runaround."

While a dispute over a charge is pending, the person involved doesn't have to repay the loan, Chopra added. "For refund rights and protections, if the consumer returns an item, that return is reflected as a credit on the buy-now-pay-later loan," he said.

Nearly 14% of buy-now-pay-later loans issued in 2021 involved a purchase that was later disputed or returned, according to a 2022 CFPB report.

The rules, which take effect 60 days after being published in the federal government's compendium of regulations and notices, provide more uniformity for a rising alternative to credit cards. Advocates called the news a win for consumers, while some major buy-now-pay-later lenders said they are already taking these steps.

Buy-now-pay-later vs. credit cards

Buy-now-pay-later lenders typically chop up a purchase's price into four interest-free installments that are slated for repayment in a short span of time, such as weeks. Interest and late fees may apply when someone takes longer to pay it all back, depending on the provider and the repayment terms.

By contrast, credit cards have annual percentage rates assessing interest on balances carried each month. These APRs are especially high now, as the Federal Reserve keeps its benchmark interest rate at a two-decade high to fight inflation.

Credit cards with revolving balances had an average 22.63% APR in the first quarter, up from 20.92% a year earlier, according to Federal Reserve data. (Meanwhile, buy-now-pay-later lender Klarna says that a new card it offers isn't a credit card - but it can still carry an interest rate ranging from 14.99% to 33.99%.)

Last year, 14% of people said they had used buy-now-pay-later platforms in the past 12 months, up from 12% a year earlier, according to Fed research released Tuesday. Buy-now-pay-later services were more commonly used by women, Black and Hispanic adults and people making less than $100,000, according to the Fed.

Just over half of users (55%) said they turned to this method because it was the only way they could afford the purchase, the Fed's research noted.

Because these services are an emerging part of consumer finance, the relaying of buy-now-pay-later loan-repayment information to major credit-reporting companies is still hit or miss. Some economists and advocates worry there's a growing "phantom debt" problem because the full picture of a person's debts aren't seen.

If people are using buy-now-pay-later platforms like they use credit cards, they ought to have the same protections, according to Adam Rust, director of financial services at the Consumer Federation of America.

"This closes that loophole on the right to receive a refund and have a dispute resolved," he said Wednesday.

While certain buy-now-pay-later providers already take these steps, the new rules mean that "all competitors have to play by the same rules," Rust noted. The next frontier should include industry standards to determine how much of a loan users can afford, he added.

How buy-now-pay-later lenders are responding

Lenders Klarna and Affirm (AFRM) said they had already been taking the measures that will be required, but acknowledged the CFPB rules may set some consistent standards in the emerging consumer-finance method.

"From our initial read, this announcement does not require any major changes to Klarna's business and we consider today's announcement to be a significant step forward in getting [buy-now-pay-later] regulation in place in the U.S.," Klarna said in a statement.

Still, it's "baffling that the CFPB fails to acknowledge the fundamental differences between [buy-now-pay-later] and credit cards in their guidance," the company added.

An Affirm spokesperson said the company was "encouraged that the CFPB is promoting consistent industry standards, many of which already reflect how Affirm operates, to provide greater choice and transparency for consumers."

"We urge other companies that offer buy-now-pay-later products to live up to the industry's promise to provide consumers with a more flexible and transparent alternative to other payment options," the spokesperson added.

How have higher prices affected your life and how you think about the U.S. economy? MarketWatch would like to hear from readers about their experiences. You can write to us at readerstories@marketwatch.com. A reporter may be in touch to learn more.

-Andrew Keshner

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05-23-24 1118ET

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