Buy Now Pay Later (BNPL) is a point of sales that allows consumer even if underbanked (not having a credit or debit card) to pay for goods or services purchased from a merchant on a deferred basis. This typically means that the purchasing consumer pays for the goods or services over one or more instalments – often without paying any more than if they had paid for the goods or services immediately – and the merchants can achieve higher sales by attracting customers who could not, or would not, purchase the goods or services by paying the full amount immediately.
There are different models for BNPL, distinguished by where the merchant itself provides the BNPL service and assumes the credit risk and those models where the merchant works with a third-party provider (BNPL provider) who provides the BNPL service to the customer and assumes (at least some) of the credit risk.
How does BNPL work?
When the BNPL provider assumes the service, the customer who wishes to purchase goods or services from the merchant will see “pay by instalments using [BNPL provider]” wording on the checkout page.
The customer will select this payment method (rather than paying immediately with a debit card for example). Here, the customer will enter into an agreement with the BNPL provider under which the latter will pay for goods on instalment (perhaps up to a certain credit limit). The customer will typically provide his payment details to the BNPL provider. The BNPL provider may carry out a credit check on the customer. The first instalment will be taken by the BNPL provider at this point.
The BNPL provider will then (either immediately after completion of the payment or within a certain period of time) pay the full amount of the purchase to the merchant, minus a discount (which represents the BNPL provider’s fees). The BNPL provider will collect the remaining instalments directly from the customer.
There is often, although not always, a contract between the merchant and the BNPL provider. This will address the discount 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.
These are some legal and regulatory points that BNPL companies should consider:
– Structure the funds flow, customer journey flow and consumer credit terms (term of the loan, number of installments, principal amount, default interest charge, assignment or sale of debt to lenders etc.) to comply with each country’s money lending and payments licensing requirements. BNPL companies will need to have in place robust compliance policies and procedures that align with consumer protection and data privacy laws. Consumer Credit Regulations (CCR) usually require a thorough creditworthiness assessment to be conducted by the credit provider to prevent the consumer from over-indebtedness.
– Reviewing the financial publicity and marketing materials.
– Taking into consideration any registration requirements to comply with anti-money laundering laws in the respective jurisdictions operating in and any regulation regarding consumer protection from predatory lending.
– Collaboration with regulators and development of an open-banking concept around consumer credit data, this may allow all BNPL companies and credit financing institutions to obtain a fuller picture of each consumer’s credit risk profile, which enables them to set precise and strict spending limits, because consumers can accumulate a lot of debt without realizing it.
The GCC region has many local players such as Saudi Arabia’s Tamara and, in the UAE, includes Postpay, Tabby, Payby, Cashew and Spotii as well as Shari’a-compliant Taly from Bahrain.
By using Tabby, if a customer misses a payment, a late fee is charged 15 days after the order is delivered. Then, the fees double for every two weeks until the overdue payment is settled, but it is capped at the third late fee.
Regarding Aramex Smart, if customers miss a payment, Aramex will levy an administrative charge of 10 Saudi riyals (Dh10) to follow up and the same charge after four weeks from the due date. After eight weeks, access to Aramex Smart will be put on hold.
In UAE, DFSA does not regulate any BNPL providers, as DFSA-regulated firms are not permitted to provide credit to retail clients when carrying out their business in or from the DIFC. Only DFSA authorized firms are permitted to provide financial services in or from the DIFC. Before entering into any financial services activity with any company, it is recommended to check at the DFSA’s public register whether it is an authorized entity. The DFSA also publishes consumer alerts on scams and firms falsely claiming to be an authorized firm on its alerts page.
As the current legalities for BNPL is unclear, we can depend on existing credit laws in the UAE. BNPL is simply credit and can be treated the same when considering the laws that relate to it. In the UAE, jurisdiction is differentiated by financial free zone and onshore areas.
In free zones such as DIFC and ADGM, where most fintech startups are located, the law is governed by the Freezone Authorities themselves. DFSA (Dubai Financial Services Authority) oversees financial services done in or from the DIFC. In ADGM, FSRA (Financial Services Regulatory Authority) regulates financial activity. For onshore economic activities, the federal laws of the UAE apply. The UAE Central Bank (UAECB), Securities and Commodities Authority (SCA) and Insurance Authority (IA) supervise financial services done in or from the UAE onshore.
Certain countries such as the UK and Australia are signaling their intention to regulate the BNPL industry.
The UK announced a series of initiatives that seek to offer more protection to consumers, raise awareness around the full implications of using BNPL services, and any lenders providing the service will need to be approved by the UK’s Financial Conduct Authority (FCA). They will also be required to perform regular affordability checks to ensure that the loans they are offering are affordable for the customers who receive them.
In Egypt, the Consumer Finance Law No. 18 of 2020 (“Consumer Finance Law”) was the first to address consumer financing activity and mandated that a license must be obtained from the Financial Regulatory Authority for companies that intends to provide consumer finance to consumers.
In addition to that, the legal framework has expanded by the adoption of the new Fin-Tech Law No. 5 of 2022 (the “FinTech Law”). The FinTech Law makes the Financial Regulatory Authority the only entity in charge of licensing and regulating non-banking FinTech companies. It also sets transparency and governance standards and protects consumer rights.
The Fintech Law highlights the main 3 licensing requirements of companies operating in the field of non-banking financial services (including consumer finance activity) using financial technology. Such requirements notably include: (i) determining direct and indirect shareholding structure as well as related parties of the applicant; (ii) the required technological infrastructure, facilities, information technology, and other security means are availed by the applicant’ and (iii) the company’s activity being limited to those specified in the license issued by the Financial Regulatory Authority. That said, the Financial Regulatory Authority shall issue further regulations addressing such additional requirements pertaining to shareholding structure, board of directors’ composition as well as conflict of interest regulations. In this regard, it should be noted that the FRA has issued a recent decree No. 58 of 2022 regarding the required conditions and procedures for incorporation, licensing and approval of companies and entities wishing to engage in non-banking financial activities through financial technology.
Do BNPLs fall under the definition of “credit”?
The “Bureau of Consumer Financial Protection” in the USA defines “credit” to mean the “right granted by a creditor to an applicant to defer payment of a debt, incur debt and defer its payment, or purchase property or services and defer payment therefor”. When looked at through the lens of the above definition, the BNPL arrangement would qualify to be a credit since they ultimately allow deferring the payment.
License and penalties.
– In UK, any lenders providing the BNPL service will need to be approved by the UK’s Financial Conduct Authority (FCA).
– Afterpay, one of the most used BNPL companies, has been considered by California’s Department of Business as a lending company and hence it should be regulated under applicable laws especially fir the consumers protection.
– Moreover, Affirm entered into a consent agreement with Massachusetts regulators in 2020 after allegations that it engaged in loan servicing activity without a license. The firm paid a penalty and agreed to register for a license.
– In UAE, only DFSA authorized firms are permitted to provide financial services in or from the DIFC.
For more information on BNPL regulations in UAE, please do not hesitate to contact us at [email protected]
Disclaimer: This publication is for informational purposes only and does not provide any legal advice.