The Consumer Financial Protection Bureau is requiring buy-now, pay-later lenders to provide the same protections to shoppers as credit card companies do.

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Nora Carol/Getty Images

The Consumer Financial Protection Bureau is requiring buy-now, pay-later lenders to provide the same protections to shoppers as credit card companies do.

Nora Carol/Getty Images

Shoppers who use buy now, pay later should have the same protections as credit card users, the federal consumer watchdog said on Wednesday.

That means people who rely on these installment payments should get prompt refunds for returned items, receive regular billing statements and be able to pause payments during investigations into disputed charges.

That’s according to the Consumer Financial Protection Bureau, which says it will begin treating buy-now, pay-later companies — such as Klarna and Affirm — as credit card providers under the Truth in Lending Act, starting in two months.

“The CFPB wants to make sure that these new competitive offerings are not gaining an advantage by sidestepping the long-standing rights and responsibilities enshrined under the law,” the agency’s director, Rohit Chopra, told reporters. “Given the growth in outstanding consumer credit and the rise in new forms of credit, we’re going to continue to carefully monitor these markets and take action to ensure that consumers are being treated fairly.”

This change does not affect how buy-now, pay-later lenders interact with credit bureaus, which the lenders are not required to report to. That has been a central distinction of this industry, allowing it to serve people with limited access to credit but also to grow without much disclosure about its scale or riskiness.

One in 5 households has used buy now, pay later, or BNPL, services, the Federal Reserve Bank of New York estimates. Its study found that shoppers fueling the growth tend to have limited access to credit, lower credit scores or missed credit card payments.

Where a credit card company will charge interest on purchases not paid in full at the end of the billing cycle, BNPL firms often let people split purchases into four or six installments interest free — without a credit check.

Struggles with refunds through BNPL

Returns and billing disputes have been particular pain points for shoppers using the installment plans.

Sharing their experiences with NPR, many describe having to continue paying off a purchase long after the item is returned for a full refund — meaning the BNPL provider issues the refund only after collecting all the installments, rather than canceling the remaining ones.

Occasionally, BNPL companies might refuse to deal directly with errant merchants, continuing to charge installments for items that never arrived or arrived damaged.

“Consumers have recourse when the merchant gives them the runaround,” Chopra said. “They can dispute a charge with the [BNPL] lender, who is then required to investigate the dispute and in some cases provide a credit to the consumer. Importantly, the consumer does not have to make payments on the [BNPL] loan while the dispute is being investigated.”

Similarly, BNPL companies have to reflect returned items as a credit on the shopper’s loan, Chopra said. Borrowers should also receive detailed disclosures about fees, pricing structures, rights and protections.

The BNPL industry grew rapidly during the COVID-19 pandemic, and the Consumer Financial Protection Bureau has been studying it since 2021. Agency officials say they will now gather comments on whether the bureau needs to clarify its new approach or issue additional guidance or rules.

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UK inflation dropped less sharply than forecast to 2.3 per cent in April, despite falling energy prices, denting market expectations that the Bank of England will lower interest rates at its next meeting.

The rise in the consumer price index was higher than the 2.1 per cent predicted by the BoE and economists polled by Reuters, while services inflation — which the BoE is watching closely — also overshot expectations.

The headline figure was the lowest since July 2021 and down from March’s rate of 3.2 per cent.

It was hailed by Prime Minister Rishi Sunak as a sign the UK is winning its battle with inflation ahead of the general election expected this year. He said the decline in the headline rate “marks a major moment for the economy, with inflation back to normal”.

However, economists said the higher than expected reading meant the chances of a rate reduction at the June 20 meeting of the BoE Monetary Policy Committee had diminished. The MPC has argued it needs more evidence that price pressures are receding before it cuts rates from their current 16-year high of 5.25 per cent.

The pound rose 0.4 per cent against the dollar to $1.2755 after the Office for National Statistics release.

Yael Selfin, chief economist at KPMG UK, said the headline reading was “within striking distance” of the BoE’s 2 per cent target, but added: “This may still not be enough to convince more cautious MPC members to commit to a rate cut in June, especially while wage growth remains elevated and economic growth momentum is strong.”

Markets lowered the probability of a June quarter point rate cut from 50 per cent to 15 per cent, with a rate reduction by September now only priced at a chance of around 80 per cent.

Investors are now evenly split on whether the BoE will deliver one or two quarter point cuts by the end of the year, having fully priced two cuts before the inflation data was released.

The BoE’s policymakers had predicted a steep fall in inflation owing to a reduction in the regulatory cap on household energy bills last month.

Data on the level of services prices will be a key factor, because the BoE sees these as an important gauge of the strength of domestic pricing pressures. 

The ONS reported that year-on-year services price growth was 5.9 per cent in April, below the 6 per cent reading for March. However, that was well above the 5.5 per cent rate of services price inflation predicted by economists and by the BoE in its latest round of forecasts. 

Tomasz Wieladek, economist at T Rowe Price, said the continued strength of services inflation meant the MPC would probably keep rates on hold for now.

“Services CPI inflation is the best gauge of underlying inflation and this remains uncomfortably high,” he said. “The data today clearly show that markets were too optimistic about a June cut and remain too optimistic about BoE cuts this year.”

Core inflation was 3.9 per cent, above a prediction of 3.6 per cent by economists polled by Reuters. That was down from 4.2 per cent the previous month.