Last week the Consumer Financial Protection Bureau (“CFPB”) filed a complaint against PayPal and Bill Me Later, a wholly-owned PayPal subsidiary. The complaint alleged that PayPal and Bill Me Later engaged in unfair and deceptive practices in violation of the Consumer Financial Protection Act of 2010 in connection with a product known as PayPal Credit.

The Allegations

PayPal Credit allows consumers to pay for purchases online and in certain stores and operates like other forms of credit. The CFPB claims that PayPal and Bill Me Later, without consumers’ knowledge or consent, opened lines of PayPal Credit for consumers and caused consumers to pay for purchases with PayPal Credit (rather than an intended ordinary PayPal account). The CFPB described several alleged failings by PayPal and Bill Me Later:

• failure to honor advertised promotional offers;
• failure to accept, process, or timely post payments made toward PayPal Credit accounts;
• failure to adequately explain various deferred-interest programs; and
• failure to adequately address consumers’ billing disputes.

The Settlement

Two days after the Complaint was filed, the Court so-ordered a stipulation entered into by the CFPB, PayPal and Bill Me Later disposing of the claims in the Complaint in exchange for a $10 million civil money penalty and the creation of a $15 million “redress” account for affected consumers.

In addition to paying $25 million, PayPal and Bill Me Later also promised that they will make clear and prominent disclosures to consumers that PayPal Credit is a line of credit before enrolling the consumers in the program. They further agreed to require affirmative consent from consumers before processing a payment with PayPal Credit or setting PayPal Credit as a consumer’s default payment method. The defendants also agreed to take measures to ensure that future PayPal Credit payments will be processed and posted in a timely manner and consumers will have an adequate means to dispute bills.

What's Next

In his prepared public remarks following the filing, CFPB Director Richard Cordray expressed an intention to hold all online payment processors – large or small – to the standards that animate the CFPB’s complaint and so-ordered stipulation: “Online shopping and the financial products that make it possible are positive features of modern life. They create great options and accessibility. But financial services providers that enable these transactions need to be careful to make sure that people are treated fairly and according to the law. And we will continue to be vigilant in protecting all consumers.”

According to the CFPB, the agency has broad authority to enforce consumer protection laws against "banks, credit unions, and other financial companies" -- which means the reverberations of the recent PayPal Credit settlement could affect financial companies providing online shopping services far outside the strict scope of online credit card relationships.

Fortunately, some of the specific fixes required by the CFPB are minor and seem obvious in retrospect. A few simple changes industry players can consider to avoid similar regulatory action include:

• using a pop-up box to clearly and prominently disclose relevant facts, for example, that a product is a line of credit and may be subject to interest;
• requiring consumers to affirmatively indicate consent to enroll in new programs by clicking a labeled button, rather than setting the program as a default and requiring consumers to opt-out; and
• using check-out pages that include multiple available payment options, rather than including a new program as the only available method of payment for a particular transaction.

For more information, you can find copies of the CFPB’s May 19, 2015 Complaint against PayPal and Bill Me Later here, the May 21, 2015 so-ordered Consent Order here, and Director Cordray’s prepared remarks on the PayPal Credit enforcement action here.