In March 2022, state attorneys general provided comments to the Consumer Financial Protection Bureau (CFPB) concerning the CFPB’s inquiry into companies that offer consumers the opportunity to divide the cost of their purchases into multiple installments, also referred to as “buy now, pay later” (BNPL) products. In response, the CFPB issued a report in September to which the Federal Trade Commission (FTC) has now issued its own guidance.

As we discussed here, the CFPB’s report indicates plans to increase regulation of BNPL products. The FTC, which shares enforcement authority with the CFPB, now clarifies that companies offering BNPL products can also be liable under the FTC Act for what they say to consumers, how they convey material information, and how they treat consumers throughout the lifecycle of the transaction. The FTC outlined three key principles that companies should keep in mind:

1. All BNPL claims must be supported by reliable data and accurate for the typical consumer, not just for a subset of consumers. The FTC emphasized that the FTC ACT’s requirement of truthfulness applies not just to “the cost of a product or the terms of the transaction, [but also] associated fees … .” For example, the FTC explained that a payment plan would be deceptive if it were advertised as “zero cost,” but the typical customer actually incurred fees.
2. Avoid “dark patterns” (design practices that manipulate users into making choices they would not otherwise have made) by viewing the transaction through consumers’ eyes and focusing on the consumers’ understanding of the material terms. Given the vast amounts of data and information that companies can harvest about consumers’ demographics and habits, the FTC warns companies not to focus on “conversion” of getting consumers to become customers, as it risks hiding or obscuring material information from consumers. The FTC stated an example of this is a user interface that offers BNPL by requiring users to navigate a maze of screens, using non-descript dropdowns or small icons, or burying information in dense terms of service.
3. If things go wrong, assume liability and do not disclaim it by pointing to others in the chain of commerce. For example, if a customer returns a product purchased through a BNPL plan, cancels the order, or has the order canceled by a retailer, the customer must get a timely refund or every “company that made misleading claims about what would happen in those circumstances” is liable under the FTC Act. Also, any delay or time spent getting the refund counts as an injury under the FTC Act, especially if the consumer had to wait a long time or do the leg work of calling a company several times.

Our Take

The recent CFPB and FTC reports and guidance come after state attorneys general urged CFPB for oversight on BNPL products. It is clear that both federal and state regulators are paying close attention to the BNPL industry, indicating that increased scrutiny and regulation are on the horizon. Companies should adopt a proactive regulatory response, based on the guidance provided, to stave off scrutiny.