Buy Now Pay Later

• What they are
• Interested parties
• Strengths and drawbacks
• Expenses
• Underlying rules
• Pitfalls

What they are

Some e-commerce websites allow their customers to pay for their purchases in instalments quickly and easily, taking not much more time than for a typical online purchase. This system, called 'Buy Now Pay Later', originated in Europe around 2012 and was exported to the USA the following year.

For customers, it normally works as follows: once they get to the payment stage, they can select, among different payment methods, the option of paying in instalments, rather than in one go. By selecting this option, they only pay a fraction of the total price upfront and, at the same time, they authorize the subsequent instalments to be automatically charged to their account or payment card. The number and amount of the instalments are usually fixed, but in some cases they can choose from several available instalment plans.

The 'Buy Now Pay Later' option is normally only available for low-value purchases.

The usual procedure is as follows: the transaction is handled by a provider (a bank, a financial intermediary or a different kind of financial services provider) which pays the seller the entire amount in exchange for a fee. It is worthwhile for the seller to pay the provider a fee, because the instalment plan option allows them to increase their customer base and sales.

Interested parties

It can be useful for customers to select the instalment option, since they will only have to pay a fraction of the total price upfront. At the same time, they authorize the subsequent instalments to be automatically charged to their account or payment card.

Strengths and drawbacks

The instalment option is easy to access. The customer's request is evaluated very quickly - in fact, it is often granted instantly, without the customer having to provide much information. The BNPL service provider does not always assess the customer's credit rating but if it does, it is usually through a simplified procedure.

Expenses

Normally, customers pay no interest. However, late payments may result in interest on arrears, which may be high. Therefore, failure to pay instalments on time may lead to paying a much higher overall price for the purchased item. Any overdue interest charges for late payment should be specified in the instalment plan's terms and conditions, which must be read carefully before opting in.

Underlying rules

BNPL is a recent and rapidly evolving payment solution and, at the moment, it is not specifically regulated. Oversight and customer protection depend on the type of instalment plan provider and on the characteristics of the transaction.

When the BNPL service is provided by a bank or financial intermediary, which are supervised by the Bank of Italy, the customer is protected by the laws on transparency in banking contracts. This means that the intermediary must provide the customer with clear and accurate information that clearly explains the characteristics, risks and charges attached to instalment plans, as well as making it possible to compare different options easily. The customer must be provided with an information sheet which clearly states the name of the intermediary providing the instalment plan, as well as the terms and conditions. The information sheet must also disclose any penalties or interest on arrears, the right to cancel (where applicable) and the means of out-of-court protection available to the customer.

Furthermore, the customer has the right to file a complaint to which the intermediary is obliged to reply, should any problems arise. If the customer is not satisfied with the reply, they can submit a complaint to the Bank of Italy and/or appeal to the Banking and Financial Ombudsman (ABF).

As well as the laws on transparency in banking contracts, the customer is also protected by the laws on consumer credit when the total amount to be paid in instalments is equal to or above 200 euros and includes fees for the customer (unless the amount of the fees is negligible and the instalments are repaid within three months). Among other things, consumer credit protection requires that the customer be issued in advance with a standardized European document, the SECCI form (Standard European Consumer Credit Information). The customer is also entitled to a full refund of any sums paid, directly from the intermediary, should the seller fail to provide the good or service or in any other case of breach of contract.

Beware! When the BNPL service is provided by an entity other than a bank or financial intermediary, the laws on transparency in banking contracts and on consumer credit do not apply. Should any problems arise, the customer has to resort to the judicial system.

Pitfalls

On the one hand, the instalment option is generally free of charge and it is easily accessible enough to be an appealing solution. On the other hand, this very ease of use risks leading the customer into impulsive purchases and into too much debt, especially if instalment payments for different purchases pile up or in the case of unexpected new expenses. As is the case for any purchase by instalments, the customer needs to be sure they will be able to bear the cost of future instalment payments. They need to be forward-looking, especially when dealing with e-commerce payments where the next purchase is just one click away, and should not give in to the temptation for immediate gratification, which may lead them to overestimate their own capacity to make the repayments.