The rapid growth of ecommerce has led to increased demand for different payment methods for consumers. One such is Buy Now Pay Later (BNPL), which allows a customer to pay for goods or services on a deferred basis.
This typically means that a customer pays for the goods or services over one or more instalments (for example, splitting the cost of a $1,000 phone into five instalments of $200), in some cases without paying any more than if they had paid for the goods or services immediately.
It is appealing to merchants as they may achieve higher sales by attracting customers who could not, or would not, purchase the goods or services if they had to pay the full amount in one transaction.
How does BNPL work?
There are a few different models for BNPL products, but we’ll focus on a model where a merchant works with a third-party BNPL provider who provides the service to the customer. That BNPL provider assumes (at least some of) the credit risk. This model can be set up in different ways, but ultimately it is the BNPL provider, and not the merchant, who is providing the solution to the customer.
Let’s take the decision-making journey of a typical customer, a customer who is about to confirm the purchase of goods from a merchant’s website. They see a payment option on the checkout page saying ‘Pay by instalments using XYZ BNPL provider’. The customer selects this payment method as an alternative to paying the full amount upfront through cash or card.
By selecting the BNPL method, the customer enters into an agreement with the BNPL provider. Under this agreement, the customer will pay for the goods or service on an instalment basis, perhaps up to a certain credit limit.
The BNPL provider will then pay the full amount of the purchase to the merchant, either immediately after completion of the payment or after a certain period of time, deducting a discount representing the BNPL provider’s fees. The BNPL provider will then collect the remaining instalments directly from the customer.
Most of the time, although not always, a contract is in place between the merchant and BNPL provider. This contract addresses the fees charged by the BNPL provider, whether the merchant should, at least in part, be liable for any instalment plans for which the customer fails to pay and any issues relating to regulatory compliance.
As these arrangements have become increasingly popular, with both merchants and customers, the widespread adoption of BNPL has led to increasing regulatory scrutiny. This is because BNPL models involve the provision of credit (as financing from the BNPL provider enables the customer to pay at a later stage than they normally would).
However, in some jurisdictions they fall outside the scope of different regulatory regimes, particularly consumer credit regimes, and so are unregulated. Concerns around the regulation of BNPL services include:
- Lack of customer understanding of credit risks: Customers have a tendency not to view BNPL as a form of borrowing (like through a credit card or a short-term loan) and so do not see the risks associated with credit provision and the consequences if they are not able to make repayments.
- Showcasing BNPL as a default payment method: Quite often, BNPL can appear as the default payment method on a merchant’s website, providing a lack of friction that allows customers to enter into a BNPL credit agreement easily and, sometimes, without thought.
- Lack of necessary affordability checks by provider: Proper affordability checks are often not carried out by the BNPL provider prior to customers adopting the payment method.
- Inconsistent spending limits: There is no standard spending limit set for the BNPL regime, causing inconsistencies, and potentially leading to overspending by customers.
- Lack of clarity on consequences surrounding non-payment: Typically, there is not enough information provided to the customers on the consequences of non-payment beforehand. In some cases, cancellation and late payment fees/charges charged, if payments are missed, can be high in proportion to the goods purchased.
- Not solely in the interest of customers: The BNPL arrangements, including marketing and advertising, are typically designed for the purpose of increasing sales for merchants, which is not necessarily in the interests of customers.
On face value, it looks like the BNPL model is just a payment method that has picked up steam during the pandemic, but it is much more than that.
A person who carries on a business of providing credit in or from the DIFC requires a licence from the DFSA. DFSA-regulated firms are not permitted to provide credit to retail clients when carrying out their business in or from the DIFC.
The only exception to this rule is where the client is another business, and the credit is provided for the purposes of that business. Therefore, a person wishing to provide BNPL services in or from the DIFC will need a licence from the DFSA and will be restricted as to the retail clients to whom they may provide the service.