What is BNPL?

A ‘buy now – pay later’ plan is a type of purchase financing option that allows customers to buy products online and pay for them over a certain period of time, in instalments.  

Known as ‘BNPL’, it is now becoming a common payment plan, particularly in the online shopping sphere, represents an alternative to paying the full amount upfront, and is typically offered at the check-out page on participating online stores via a third party such as a ‘fintech’ (financial technology firms) or ‘paytech’ (payments technology company) entity such as Afterpay, Klarna, PayPal or the merchant itself (through own credit facility, such as Apple Pay Later, Zalando Invoice Payment, Very Ireland Delayed Payment, Revolut Ireland BNPL).  

In this process, the customer is required to make an initial payment at the time of purchase, which is usually a percentage of the total cost, and then make additional payments over a set period of time. The specific terms of the plan, such as the number of payments and the interest rate, can vary depending on the provider and the online store. The payment plan is in effect a form of credit option offered in partnership with accredited banks, within a framework of flexible financing, whereby the creditor effectively gives the consumer (the customer/buyer) a loan by paying the merchant (online store). The BNPL provider pays the merchant for the purchase and the consumer then pays the BNPL provider usually within 30 days. 

Why use BNPL?

BNPL plans can be a convenient option for customers who don’t have the full amount required for a purchase or prefer to spread out payments over time. Many shoppers may perceive BNPL options as an on-the-spot checkout alternative to credit cards. The option is attractive as, generally, is a fee-free, interest-free finance/loan arrangement for consumers, as long as they repay the borrowed amount within the agreed period. The online merchants support the BNPL fees instead.  

There are many consumer benefits to BNPL, such as flexibility and convenience. Indeed, webshops report a higher level of consumer trust, and therefore higher purchasing incentives. It also reverses the financial burden on the consumer having to pay for a product in full online, only to return it upon receipt and then wait for the refund of the full amount. Opting for a deferred payment or an instalments schedule also means that the e-commerce model is changing: customers can pay only a small percentage of the cost, have it delivered, have the opportunity to test it and then return it, if unsatisfactory, before having to make a full payment.

Nevertheless, as deferred payment systems are becoming more common, along with other loans such as (re)mortages, car leasing, and personal loans, there is a risk of financial debt becoming the norm in society, even for everyday expenses such as food delivery (via Klarna on Deliveroo Ireland, for example), not just long-term necessities, such as housing, transport, renovation, etc. A notable risk is that, because BNPL providers do not or cannot check customer credit scores, there is a real risk that consumers who are already in debt, will become overindebted as a result of being able to access (sometimes multiple) BNPL options easily.

As the BNPL and other credit facilities are becoming more prominent, particularly in the current cost-of-living crisis in Ireland and elsewhere, educating consumers and regulating pay-later options is an important step in curbing overconsumption, as well as supporting sustainability and the circular economy. A recent Forbes survey in the UK, for example, revealed that “70% of BNPL shoppers have turned to these services more frequently in the last six months” (of 2022) with a particularly high usage reported in the 18 to 34 age bracket, most of whom use BNPL to shop for fashion and smart devices.

Why say ‘No’ to BNPL?

Though most BNPL are short-term, interest-free loans, there may be hidden fees, interest charges, late fees and penalties attached, all of which can become debt traps over time. As these unpaid fees accrue interest over time, the purchase overall cost will become much higher than expected.  While accessing BNPL options is relatively easy, the consequences of failing to make the payments are similar to those of regular loan agreements: penalties, impacted credit scores, debt collection, legal action against the consumer.  

Overspending and overconsumption and a lack of uniform regulation of ‘Buy Now, Pay Later’ has exposed vulnerable consumers around Europe to over-indebtedness before regulatory initiatives introduced more clarity and supervision in selected Member States. Until legislation comes into force in Europe, Ireland and all other jurisdictions in the EU and the EEA within the European Single Market, online consumers are advised to review the terms and conditions of their BNPL plan carefully before entering the agreement, particularly as many shoppers now use these microloans for every-day online purchases. 

Though BNPL loans are within the provisions of the EU Directive 2008/48/EC on credit agreements for consumers, they differ from standard credit products (bank loans, credit cards) in that they offer a simple and easy activation process within the e-commerce process, at the time of the purchase, and does not require providing extensive personal and financial information. It makes BNPL extremely effective in terms of user-friendliness, simplicity of the process and increasingly wider availability. There are limitations in terms of loan value and applicable interest, which makes them exempt from the regime of consumer credit regulations in most EU jurisdictions (credit agreements for less than EUR 200, free of interest and repayable within 30 days to 3 months, typically). 

Who regulates BNPL in Europe?

Amendments are planned to the European Union Consumer Credit Directive aimed at bringing BNPL products in line with the obligations set on standard consumer credit providers in terms of regulatory supervision and licensing, and ultimately protecting consumers from over-indebtedness. Sought changes will extend the provisions to credit agreements under EUR 200 and up to EUR 100 000, even when interest-free and repayable within three months, which will cover the most common BNPL products. This is already happening in some European countries, such as Ireland, for example, where the Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Act 2022 effectively brings pay-later finance providers operating in Ireland under the regulation of the Irish Central Bank, just like regular banks. The Money Advice and Budgeting Service of the Citizens Information Board of Ireland provides a useful guide to BNPL here. Also check out the BNPL consumer advice from the Competition and Consumer Protection Commission here.

Ultimately, in terms of consumer protection within the Single Market, the European Commission aims to harmonise the regulatory landscape of credit providers so that all EU consumers enjoy the same level of protection for both domestic and cross-border transactions facilitated through BNPL products. Regulators at both European and national levels are taking measures because they are concerned about how BNPL is impacting on consumers’ buying habits and credit history in the long run. It is why it is important to remember that BNPLs are credit agreements, which come with complex terms, conditions and obligations from the viewpoint of the consumer. Meanwhile, solutions proposed by consumer organisations, such as the European Consumer Organisation (BEUC) here, include affordability assessment and financial risk education for prospective customers, clarifying the legal distinction between credit and deferred payment and regulatory consumer protection by banking systems and statutory authorities.