Buy Now Pay Later – Contractual and regulatory legal framework
Buy Now Pay Later (BNPL), the fast and easy financing of online shopping for consumers, is making headlines. This form of consumer finance is now a completely common service offered by internet merchants. At the same time, concern is growing that these offers are resulting in excessive debt among - especially young - consumers (see, for example, Die Zeit, No. 30/2022, Ratenkauf - Generation Pump). Therefore, it is worth taking a look at the legal framework for BNPL. All the more so as the European Commission seeks tighter rules for it in the interest of consumer protection.
For the regulatory classification of BNPL and the very fundamental question of who is allowed to offer this form of financing at all, a distinction must be made between the conceivable and the common forms of BNPL.
If the online seller itself offers the financing of its merchandise or service as a purchase in installments or with payment at a later date, (financial) regulatory law does not set any limits to this. In particular, this is not a credit transaction as defined by Sec. 1 No. 2 of the German Banking Act (KWG), and the merchant does not require a banking license for this (permit under Sec. 32 KWG). The German Federal Financial Supervisory Authority (BaFin) does not consider it a credit transaction if the seller credits his sales by deferring the purchase price, even if the customer has to pay interest. Although the seller gives the shopper a credit in an economic sense, this credit is not based on a loan agreement, but solely on an atypically structured purchase agreement (according to BaFin in their information memorandum on credit transactions of 02.05.2016).
In practice, however, online providers generally work with financial service providers to collect the purchase price immediately and not to bear the risk of non-payment by their customers. Thus, consumer financing is not provided by the online supplier of the merchandise or service, but rather by the respective financial service provider.
Two structures are common: Either the financial service provider acquires the online provider's payment claim against the customer, pays the online merchant immediately in return, and allows the consumer to pay later or in installments. Or the financial service provider grants a loan to the consumer, pays the loan amount directly to the merchant to settle the merchant's payment claim, and grants the consumer the option to repay the loan later or in installments. In the first structure, with an ongoing cooperation between the online vendor and the financial service provider, this constitutes factoring within the meaning of Sec. 1 (1a) s. 2 no. 9 German Banking Act/Kreditwesengesetz - KWG, while in the second structure, the financial service provider conducts lending business within the meaning of Sec. 1 (1) s. 2 no. 2 KWG. For both structures, the financial service provider needs a license according to Section 32 KWG or according to the so-called European Passport.
In these forms, consumer protection against excessive indebtedness is already provided for by (financial) regulatory law, in particular with the obligation for the financial service provider under Sec. 18a KWG to check the creditworthiness of the consumer and to refrain from providing financing if there are substantial doubts about this. However, the actual protection rules for consumers are to be found in the contractual law rules governing consumer loans and range from extensive information requirements to rights of withdrawal and protection in the event of default on payments. For this reason, and because these protection rules also require considerable effort and expense from the financial services provider, it is important to know which civil law rules for consumer loans also apply to BNPL.
In principle, according to Sec. 491 of the German Civil Code (BGB), the (consumer-protection) rules for consumer loans always apply if the financial service provider grants a consumer loan to a consumer (with payment to the online provider). However, there are still exceptions to this, which BNPL providers take advantage of when structuring the financing. In particular, the regulations for consumer loans do not apply if small loans of less than 200 euros (net loan amount) are provided, if the loan is free of charge or interest or if the loan only has a short term of up to 3 months and comes at low costs. If, on the other hand, BNPL is structured as factoring, the rules on consumer loans only apply to this deferred payment under Section 506 of the German Civil Code (BGB) if the financing assistance is provided at a cost. Thus, the consumer protection rules do not apply if BNPL does not increase the purchase price and the consumer does not have to pay interest or other fees for the deferred payment.
In the meantime, however, there is growing recognition that BNPL structures which are not regulated by contract law as consumer loans, i.e., small loans and (short-term) loans free of cost, can also lead to over-indebtedness of consumers due to excessive financed consumption. The Commission's draft revision of the European Consumer Credit Directive (COM(2021) 347) therefore seeks to subject loans of less than 200 euros, interest-free and fee-free loans, and loans with a maximum term of three months and negligible costs to the contractual consumer protection for consumer loans (see our article on the draft new Consumer Credit Directive). However, according to the ideas of the European Council (2021/0171(COD)), member states should still be able to provide exemptions from the consumer protection rules for these forms of consumer credit.