US BNPL regulation debate intensifies with trade body lawsuit

Hand turns dice and changes the expression 'buy now pay now' to 'buy now pay later'.
Editorial credit: FrankHH / Shutterstock.com

The Financial Technology Association (FTA) is pushing back against new US regulations on “pay-in-four” buy now, pay later (BNPL) products.

In its lawsuit, the fintech trade body claims the Consumer Financial Protection Bureau’’s (CFPB) final interpretive rule is rushed, legally oversteps its authority, and could lead to confusion for consumers.

Earlier this year, the CFPB classified all BNPL lenders as credit card providers, meaning users will be subject to the same legal protections and rights as traditional credit card holders. 

Under these regulations, the CFPB has outlined specific requirements for BNPL services, focusing on three key areas: handling dispute investigations, managing refunds for returned items or cancelled services and issuing billing statements.

In May, Swedish fintech Klarna described the decision as “baffling” and explained that the CFPB should recognise key differences between BNPL and credit cards. Klarna is one of the leading companies in BNPL, having established a dominant presence in Europe and now pursuing more market share in the US.

In support of this stance, the FTA has opened a lawsuit against the decision, hoping the CFPB will change its mind and work with the BNPL industry to create new “durable” rules for the future. 

Penny Lee, CEO and President of the FTA, commented: “Millions of Americans choose to pay in four with BNPL, and our industry welcomes regulation that fits the unique characteristics of these products without duplicating existing rules and protections. 

“We share the Bureau’s goal of promoting consumer health and well-being and are committed to working with the CFPB and other regulators to craft durable rules for the future that fit the unique nature of pay-in-four BNPL products and strengthen protections that these products already provide to consumers.

“Unfortunately, the CFPB’s rushed interpretive rule falls short on multiple counts, oversteps legal bounds, and risks creating confusion for consumers.”

Lee noted that the CFPB is attempting to fundamentally change the regulatory treatment of pay-in-four BNPL products without following proper procedures, exceeding its authority, and acting unreasonably. She stressed that the CFPB’s attempt to impose credit card regulations on pay-in-four products demonstrates a basic misunderstanding of BNPL.

This was also the viewpoint of Klarna in May, which compared credit cards and BNPL to “orange and apples”. 

BNPL has become a popular payment choice for consumers globally, offering benefits like zero interest on outstanding balances, no compounding interest and the ability to pause accounts if payments are missed.

However, the sector has operated without regulation for a long time, although this is beginning to change. Concerns have also been raised by some regulators and policymakers about the potential to drive indebtedness.

Last week, HM Treasury announced new rules for BNPL in the UK and launched a consultation to enhance consumer protection. These changes will require the Financial Conduct Authority (FCA) to implement affordability rules in the BNPL sector.

In contrast to the US, the new UK rule changes have been welcomed. Michael Saadat, International Head of Public Policy at Clearpay, expressed support for the regulations while money-saving expert Martin Lewis praised the announcement on X (Twitter). The US could consider adopting similar rules to the UK’ within its own framework to find a middle ground with the sector.

Lee concluded: “Lasting regulation must be grounded in existing statutory procedures and provide the public with an adequate opportunity to participate in the formulation of those rules. 

“We urge the CFPB to withdraw its interpretive rule and engage in an appropriate process to determine how best to regulate pay-in-four products.”