New York state is set to regulate the “buy now, pay later” loans used to pay for hundreds of millions of online and in-person purchases each year, stepping in to fill a void left when President Donald Trump’s administration rolled back similar efforts at the national level.
Gov. Kathy Hochul and state lawmakers agreed to enact a wide-ranging set of rules for the burgeoning industry dominated by companies including Klarna, Afterpay, Affirm and PayPal, who offer consumers the ability to split their purchase into multiple, interest-free payments.
The new law, approved as part of the $254 billion state budget last month, includes a series of protections for those who use the services, including the right to a refund if they return a product and a requirement that the companies set up a process to resolve customer disputes.
The companies that offer the mini-loans are — for the most part — displeased with the New York regulatory effort, with one trade group calling it a “fundamental misunderstanding” of how the service works.
But Sen. James Sanders, a Queens senator who helped spearhead the new rules, said they’re meant to protect the millions of New York consumers who make use of the companies’ loans — particularly lower-income people who may be tempted to spend beyond their means.
“ We are not trying to put a stop to new financial technologies and new ways of doing things,” Sanders said. “We think that there's room in New York for them — as long as they understand that in New York, we have rules.”
The buy now, pay later industry has grown exponentially in recent years, to the point where most major retailers — including Amazon, Walmart and Target — ask their customers whether they want to split their purchase into monthly or biweekly installments.
In 2019, the six major buy now, pay later lenders were averaging about 100,000 applications a day. By 2022, that was up to 1 million a day — with more than 1 in 5 U.S. consumers having borrowed from one of the companies at some point, according to a Consumer Financial Protection Bureau report earlier this year.
The loans generally don’t rely on interest payments, like credit cards or traditional loans do. Instead, the lender charges a fee to the merchant, usually between 2% and 8% of the purchase price, according to the CFPB. Some companies apply late fees if a consumer misses their payment deadline.
New York enacted its new law less than a month after the Trump administration’s CFPB announced it would no longer enforce a Biden-area policy that effectively treated the buy now, pay later lenders the same as credit card companies. That federal policy gave consumers similar protections to what New York is now enacting.
Lauren Saunders, associate director of the National Consumer Law Center, said New York is the first state to adopt a “somewhat comprehensive state regulatory regime for buy now, pay later loans.”
“That’s important because it's an exploding marketplace and there's a real gap in consumer protections,” she said.
But the Financial Technology Association — which represents PayPal, Zip and other companies offering buy now, pay later services — is pushing back. The association’s president and CEO, Penny Lee, says the companies’ offerings are “fundamentally different from credit cards and should be regulated appropriately.”
Buy now, pay later companies often partner with banks to offer their services. New York’s regulations, however, won’t apply to banks that are chartered by the federal government, which the association says will lead to an uneven playing field.
“At a time when New Yorkers are struggling with high prices and record levels of credit card debt, we should be finding ways to increase access to low-cost, innovative credit products like BNPL,” she said.
Another trade group — the American Fintech Council, which counts Affirm among its members — took a softer approach, though not without offering some criticism of the new law. CEO Phil Godlfeder, a former state assemblymember from Queens, called it an “important step forward in the pragmatic, consistent regulation of BNPL.”
“But while some provisions are a step in the right direction, other language has the potential for unintended consequences that would limit consumer choice, decrease responsible access to credit and create an uneven playing field,” he said.
Under the new state law, most buy now, pay later lenders that operate in New York will be required to get a license from the state Department of Financial Services, which regulates the banking industry.
The department will be able to set caps on the maximum, cumulative amount the companies can loan to any single consumer. The department’s superintendent, meanwhile, will be able to suspend a company’s license for up to 30 days while they investigate certain potential rule violations.
Hochul first tried to regulate the industry last year, when Biden was still in office but before his administration began treating the lenders like credit card companies. But her initial proposal fell out of state budget talks last year. She and lawmakers were able to reach consensus on a similar plan in this year’s budget.
“Buy now, pay later loans currently lack sufficient oversight, and the state will implement a licensing and supervision regime for BNPL loans to provide strong oversight of this rapidly growing market,” Hochul spokesperson Kassie White said in a statement.
The new law will take effect 180 days after the state Department of Financial Services issues a series of regulations to implement the measure, a process that will take at least several months.
When asked if buy now, pay later companies are planning a lawsuit to challenge the new law, a spokesperson for the Financial Technology Association declined comment.
