The Financial Technology Association (FTA), representing major BNPL (Buy Now, Pay Later) providers, has filed a lawsuit against the US Consumer Financial Protection Bureau (CFPB) to block a new rule that applies credit card protections to the BNPL market.
Filed in the US District Court of the District of Columbia, the lawsuit challenges a CFPB rule issued in May 2024, which imposes traditional credit card protections on BNPL products.
BNPL providers such as Affirm, Klarna, PayPal, and Block offer consumers the ability to make purchases in instalments, usually in four payments, without paying interest.
The new CFPB rule mandates BNPL companies to issue billing statements, investigate disputes, and provide refunds for returned products – rules that currently govern credit card companies under the Truth in Lending Act.
However, the FTA argues that the CFPB overstepped its authority by implementing this rule without following the proper administrative procedures.
“The CFPB is seeking to fundamentally change the regulatory treatment of pay-in-four BNPL products without adhering to required rulemaking procedures,” said Penny Lee, President and CEO of the FTA, in a statement.
The FTA contends that the agency bypassed the notice-and-comment requirement stipulated by the Administrative Procedures Act, labelling the rule as “interpretive” rather than undergoing a formal rulemaking process.
The rule took effect on July 30, 2024, but the CFPB granted a grace period for enforcement.
The FTA, however, has expressed concerns that the rushed implementation could create confusion among consumers and BNPL providers.
“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,” said Lee.
The FTA’s lawsuit also argues that the CFPB’s rule does not reflect the unique nature of BNPL products, which often carry no interest and pause accounts when consumers face financial difficulties.
“Consumers are having positive experiences with pay-in-four products and benefit from strong consumer protections such as zero interest on outstanding balances,” added Lee.
As the BNPL market continues to grow, attracting millions of consumers seeking flexible payment options, the outcome of this lawsuit could shape the future regulatory landscape for the industry.
The FTA hopes the court will overturn the rule and urges the CFPB to engage in a more collaborative process to regulate BNPL products appropriately.
With increasing scrutiny on BNPL services, this legal challenge underscores the tension between regulatory bodies and fintech providers as they navigate the evolving financial landscape.
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