Want to impress your friends at the next party with a new espresso machine, but your paycheck is still four weeks away? No problem – Buy Now Pay Later (BNPL) makes it possible. The term refers to payment methods that allow end customers to receive a service or product now – e.g. an espresso machine – and pay for it later. Or: someone who can’t decide between five pairs of shoes might have all of them delivered, try them on, return four pairs and only pay for the one they keep.
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This payment method is popular. Germans have long been familiar with the model through classic mail-order catalogues. With the rise of e-commerce, these models have spread across Europe under the term Buy Now Pay Later.
Involved Parties
A typical BNPL setup involves three parties:
- the end customer, who might not make the purchase without such an offer,
- the merchant, who wants to sell the product but not pre-finance it,
- the BNPL provider, who facilitates the payment method for the merchant.
Contractual Relationships
The merchant and the BNPL provider enter into a factoring agreement. Key questions include: Who owns the receivable at what time? Who is liable for defects in the purchased goods? Who needs the end customer’s data, and when? How is the advanced amount refinanced? These and similar civil law questions must be answered against the backdrop of increasing EU regulation of banks and payment service providers.
The core of such a factoring agreement is the sale and assignment of the merchant’s receivables against the end customer to the BNPL provider. The merchant typically guarantees the validity and enforceability of the receivable (known as “Veritätsrisiko”).
There are two main types of factoring agreements: “true” and “non-recourse” factoring. The difference lies in who bears the default risk:
In true factoring, the BNPL provider also assumes the credit risk if the end customer defaults. This is usually treated as a purchase agreement.
In non-recourse factoring, the credit risk remains with the merchant. The BNPL provider first tries to collect from the customer but can turn to the merchant if unsuccessful. Legally, this is treated as a loan agreement.
Typically, BNPL products involve true factoring. The end customer and the BNPL provider often do not enter into a direct contract; the provider merely handles the payment processing.
Contractual freedom is limited by general principles of civil law and regulatory requirements.
Regulatory Classification
BNPL providers operate a business that requires a license. At first glance, this may appear to fall under factoring according to § 1 para. 1a sentence 2 no. 9 KWG. However, BaFin usually classifies BNPL products as payment services under the ZAG, particularly as an acquisition transaction (§ 1 para. 1 sentence 2 no. 5 ZAG) or a money transfer service (§ 1 para. 1 sentence 2 no. 6 ZAG).
For a deeper dive into this topic, we recommend this blogpost.
Anti-Money Laundering Obligations
As a regulated institution, a BNPL provider is also subject to obligations under the German Money Laundering Act (GwG).
Accordingly, the provider must identify the merchant as their customer.
However, there is generally no obligation to identify the end customer, as there is usually no “business relationship” within the meaning of § 1 para. 4 GwG.
Consumer Credit Law
Whether consumer credit law applies to BNPL products depends on the specific structure of the product.
A purchase on account with a single payment due in 30 days is generally not subject to consumer credit law.
An installment purchase with interest, however, typically is. In such cases, the merchant and customer agree on installment payments and interest, and the merchant assigns the receivable to the BNPL provider. This constitutes a payable installment agreement under § 506 para. 3 BGB, triggering the application of consumer credit law (e.g. form requirements, pre-contractual information).
Stay Tuned: What’s Coming Next
It’s worth examining BNPL in greater detail. How will the new Consumer Credit Directive impact these products? What changes will PSD3 and the PSR bring? What about factoring in highly regulated sectors, like healthcare? How does data protection play into this? And when things go wrong – how is everything unwound? BNPL is a jungle of regulatory, civil law and technical issues. In upcoming posts, we’ll guide you through it step by step.
