In a significant move to address consumer concerns, the Biden administration has announced that customers using "buy now, pay later" (BNPL) services will now have the same legal protections as credit card users. The ruling, issued by the Consumer Financial Protection Bureau (CFPB) on Wednesday, aims to safeguard consumers' rights when utilizing BNPL services for their purchases.

Under the new ruling, consumers will have the right to dispute charges and request refunds for products bought with a BNPL loan. BNPL companies will also be required to investigate customer disputes, temporarily pause payment requirements during the investigation process, and furnish customers with periodic billing statements. The CFPB further highlighted in its assessment that the absence of such protections has the potential to create chaos for consumers who may reconsider their purchase decisions.

CFPB Director Rohit Chopra emphasized that consumers should be entitled to essential consumer protections, regardless of whether they use a credit card or opt for BNPL options. He stated, "When consumers check out and choose Buy Now, Pay Later, they don't know if they will get a refund if they return their product or whether the lender will help them if they didn't get what was promised."

While BNPL services remain relatively limited among American borrowers, their popularity continues to grow. According to a recent survey conducted by the Federal Reserve, approximately 1 in 7 people used a BNPL service last year, marking a 2 percentage point increase from 2022. Many borrowers have been drawn to BNPL as an alternative to credit cards due to higher interest rates and rising prices. However, BNPL services come with their own set of pitfalls, including potential negative impacts on credit scores for missed payments.

The growth of BNPL services has been particularly driven by younger consumers. The Federal Reserve survey revealed that 1 in 6 people aged 18-44 utilized BNPL in 2023, with Generation Z and millennial borrowers relying more heavily on these platforms for daily essential purchases like groceries. However, the CFPB found that many BNPL customers have weaker financial situations, with higher credit card utilization rates and lower credit scores compared to non-BNPL borrowers.

While Wednesday's ruling aims to strengthen consumer protections, it may face resistance from BNPL firms, as previous CFPB announcements have led to legal suits from major business groups. The Financial Technology Association, which represents BNPL firms, argues that BNPL products differ fundamentally from credit card offerings and asserts the need to distinguish the two. BNPL lender, Klarna, highlights that it already provides most of the customer remedies proposed by the CFPB and underlines key differences in how BNPL functions compared to credit card companies.

BNPL companies such as Klarna and Affirm expressed their commitment to engaging with the CFPB and improving their practices to align with consistent industry standards. Affirm stated that it was encouraged by the CFPB's promotion of industry standards that already reflect their operational approach, including dispute resolution processes and Truth In Lending disclosures.

Overall, the Biden administration's extension of consumer protections to BNPL services aims to ensure a more secure and transparent experience for customers utilizing these increasingly popular purchasing options.