The Consumer Financial Protection Bureau (CFPB) is reportedly planning to drop its controversial rule on buy now, pay later (BNPL) companies.
Last year, the US agency classified BNPL lenders as credit card providers. This meant BNPL users were given the same rights and legal protections as credit card holders. The Financial Technology Association (FTA) criticised the move as “rushed” and filed a lawsuit challenging the decision.
According to Bloomberg, the lawsuit has been successful, and the CFPB now intends to withdraw the rule.
Penny Lee, President and CEO of FTA, said: “This interpretive rule was deeply flawed, seeking to fundamentally change the regulatory treatment of pay-in-four BNPL products without legislative authority and without a clear and proper understanding of the unique nature of the product.”
On Wednesday, the FTA and CFPB jointly asked Judge Ana C. Reyes for a pause in the case while the agency works to scrap the rule. The CFPB said it will file an update by 2 June and continue to report progress every 30 days after that.
A welcome change
Klarna, a member of the FTA, was very vocal about the issues with the ruling at the time, labeling the decision as “baffling” and explaining that the CFPB should recognise key differences between BNPL and credit cards.
Reacting to the ruling last year, Klarna wrote: “Credit cards typically allow users to borrow up to a predetermined limit, are underwritten at a moment in time, and charge revolving interest on unpaid balances. They typically come with various fees, including annual fees, and interest charges that can accumulate if the balance isn’t paid off each month. Leading to debt of over $1trn and rising in the US.”
Klarna’s viewpoint is that by using blanket regulation for all loan products, the US is failing to understand the key differences. However, it isn’t the only country concerned about the use of BNPL.
Perspectives elsewhere
Australia started to regulate the BNPL space, perhaps less favourably than firms would’ve hoped for. In January, the Australian Securities and Investments Commission (ASIC) reminded that BNPL firms must apply for a credit licence ahead of the implementation of new laws.
These laws require providers of BNPL contracts to hold a credit licence and become a member of the Australian Financial Complaints Authority ahead of 10 June, with Steven Jones, Assistant Treasurer, warning about the risks of the payment method.
“We have heard that some people are opening multiple BNPL accounts, to access far more debt than they’d be able to get on a credit card or a payday loan,” Jones said.
“And we have also heard that some people may be weaponising BNPL products in abusive relationships – doing things like coercing their partners to take on BNPL debts or taking out BNPL debts in their partner’s name without their knowledge.”
Klarna dismisses these concerns, referencing that 99.4% of Klarna loans are repaid in full. However, it is yet to be seen how other countries will regulate the market, with the UK expected to announce more information later this year.
