Buy-now-pay-later: what do I need to know?

What is BNPL?

Buy now, pay later (BNPL) is point-of-sale finance that allows consumers to spread payments for single purchases over a few installments. It is typically available for lower-value purchases and allows payments to be spread across a few months. This differentiates it from more traditional forms of point-of-sale credit for large one-off payments or store cards that offer a credit line.

BNPL has been offered on digital channels but is becoming available for in-store use.

What should I know about BNPL?

BNPL is not a regulated financial service in many countries. Where it is, the licensing and compliance requirements vary from country to country. Even in the EU, there is no consistent statutory position.

National regulators in some countries have been looking at how BNPL works, whether there could be customer detriment and whether providers should have a financial services lending license and comply with lending regulation.

What does this mean for retailers?

Retailers have direct and indirect considerations, whether engaging with BNPL in one country or across several

• Do you provide this BNPL product yourself?

If so, do you have or need a financial services or lending license in a given country? What compliance rules apply (eg, value and payment term thresholds) that dictate the regulation that applies? Are there requirements related to the customer journey and T&Cs (these can be prescriptive if lending regulation applies)?

• What do you need to think about if you are offering someone else's BNPL product?

Does the retailer need a license? Or do they need to meet certain compliance requirements? The introduction of regulated loans sometimes requires this. It is important to check.

• What should you be thinking about if you are partnering with a BNPL firm?

Do they have a lending license? Do they need one? How do you check? What proof should you seek, and what contractual protections are in place?

• Is the regulatory landscape changing for BNPL in a given country?

For example, is it due to become regulated and subject to compliance requirements? What are they? How do they affect the customer journey and who is responsible for them? Who should be responsible for looking out for changes, identifying what they mean and preparing for them? How much notice might you expect? Contracts should address the allocations of responsibilities for being on notice and ready for any change.

• What else should you think about?

What other requirements apply, such as non-sectoral rules? For example, the UK’s Financial Conduct Authority (FCA) has recently looked at whether BNPL firms are complying with “unfair contract terms” rules and customer cancellation rights for credit if returning goods. These UK rules have significant roots in EU law and continue to apply in the same way post Brexit, so check whether similar considerations apply in the UK and EU.

What can I do?

Understand the legal and regulatory status of BNPL in any relevant country. Think about your role in offering BNPL to customers.

It is important to be clear about who is responsible for compliance and licensing. Think about the contractual framework you need if a BNPL product that wasn’t regulated becomes regulated or if a regulated provider doesn’t comply with the relevant rules. Can your customer journey be the same in every country, or do different rules apply locally? 

Case study: the UK

BNPL is going to become regulated where it is not already. BNPL firms will need to have a license from the Financial Conduct Authority (FCA). The government has confirmed that partner retailers won’t need a license.

Regulatory compliance of products will increase. The BNPL firm will be the one having to comply. Retailers should consider customer-journey impacts and make sure compliance responsibilities are correctly allocated and contractual protections considered. It is not expected that the requirements around customer journey, content and documents will be as extensive as for traditional consumer credit. The UK government’s latest consultation suggests that regulation should be “proportionate” but not “so burdensome that it inhibits the produce being offered, or reduces consumer choice.”

A timetable has not been confirmed. Regulatory consultations are under way. In the meantime, the Advertising Standards Authority has published clarification about advertising content.

Case study: Ireland

BNPL firms do not yet need to be authorized. New rules developed by the Central Bank of Ireland will mean they will need authorization as retail credit firms. This change is expected in 2022.

The proposed legislation will affect other forms of consumer credit, hire and hire purchase. It imposes an APR cap of 23 percent on credit and hire purchase agreements (other than money-lending agreements).

Case study: Netherlands

In principle, BNPL is regulated as consumer credit. Providers or introducers may be able to rely on exemptions from licensing requirements. The most common exemptions are:

• BNPL that must be repaid within three months, for which only insignificant costs are charged, and
• Intermediaries with a main professional activity aside from intermediating in consumer goods credit (eg, most retailers), subject to meeting extra requirements.

Case study: US

Licensing and regulatory requirements vary from state to state and depend on product features. Regulators have broad discretion in interpreting and applying their laws. Companies face some regulatory uncertainty when introducing BNPL products to the US market. Some state regulators have increased their focus on BNPL in recent years (eg, Californian action for lending without a lending license). Money transmitter laws may also apply.

Federal regulations could additionally apply. These cover conduct (eg, fee disclosures, advertising, anti-discrimination and credit reporting obligations). Federal regulators are looking more closely at BNPL products and firms as the market evolves.