September 2023

Buy Now Pay Later (BNPL) for E-Commerce: Regulatory Update

Along with the rising popularity of buy now, pay later as a payment method in e-commerce, a need to better regulate the new business model arises as well.

What is Buy now, Pay Later (BNPL)?

Buy now, pay later is a payment method that allows customers to pay off the purchased product in multiple fixed installments. It can also be described as a short-term financing option: with BNPL, the customer doesn’t need to secure credit before going shopping as the credit is generated in real-time, at the point of sale. The customer is bound to pay back the amount in installments, the merchant receives the full payment upfront, and the buy now, pay later provider manages the payment collection from the customer.

Sure, payment in installments has existed before, but fintech companies have revolutionized this model by making it easily accessible. Emerging in the early 2010s, the BNPL business model has risen in popularity over the past few years, often as an alternative to credit cards which are more difficult to obtain and can have high-interest rates. In e-commerce, BNPL is usually one of the payment options offered along with debit and credit cards or other methods. 

The installments are usually bi-weekly or monthly and often don’t imply any additional fees or interest rates – so long as the customer pays off the installments in time. How does BNPL make money if the service doesn’t charge additional fees to customers? The BNPL providers charge transaction fees to retailers, in exchange for driving new customer traffic and achieving greater basket value.

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Consumers’ Reasons for Using BNPL Services

For consumers, using the buy now, pay later services offers multiple benefits. According to a 2020 survey, some of the biggest advantages of BNPL for customers include clarity of fees or interest rates (42%), the ability to monitor spending (40%), and the convenience of the option and number of merchants accepting this type of payment (37% each).

Buy now, pay later is a convenient and flexible payment method that allows customers to make bigger purchases, with the cost of the product remaining the same. With BNPL, there are no interest rates and additional fees (provided the payment is made on time), which makes it more affordable than traditional loans.

This makes it competitive with credit cards, which have limited eligibility, often requiring customers to be of a certain age, and have a defined minimum income and a regular salary. While BNPL services do usually run a soft credit check on the customer before allowing the release of the funds, they are accessible to a much larger demographic than credit cards, and typically do not impact the customer’s credit score.In a time of economic uncertainty and flexible work contracts, small loans provided by BNPL services can help customers make bigger purchases as they mostly make their profit from the merchant and not the consumer. This has proven to be a great advantage of the BNPL business model.

Why is BNPL Good for Retailers?

Okay, so the buy now, pay later business model is great for the service providers as well as for the customers. But what makes it viable for retailers? They pay the BNPL provider a commission – usually between 2% and 8%, plus a fixed transaction fee. In turn, the retailers get to reach a wider customer demographic by offering a flexible payment method, to boost conversion and increase their average order value. There is no risk for the retailers, as they receive the total transaction amount immediately, while the buy now, pay later business is in charge of the risk management. 

Answering the consumer need for flexibility in an ever-changing economic environment, the BNPL business model is now one of the fastest-growing trends in e-commerce. Euromonitor’s research, which covers 47 European countries, has shown that BNPL transactions increased by over 300% between 2017 and 2022, and that the buy now, pay later transactions might soon reach USD 156 billion – a number comparable to the value of all personal payment transactions in Denmark. Although BNPL as a preferred payment method was shown to be present among different age groups, its popularity among younger generations is a good predictor of its potential longevity.

Another reason why BNPL is good for retailers is that it offers a solution to one of e-commerce’s key pain points: the situation in which the consumer needs to make a large purchase at a moment when they are not able to pay the full amount. It also solves the problem of the price being the most common reason for cart abandonment, allowing the customers to go through with their purchase. For retailers selling lower-priced products, BNPL offers an incentive for customers to buy additional products. Apart from increasing sales, BNPL offers a better customer experience, ultimately lowering return rates, ensuring retention, and building customer loyalty.

BNPL: The Regulatory Landscape in Europe

As new, alternative payment solutions develop, so do state and international legislations that seek to regulate new practices. Some of the issues that the European Commission is most concerned about the lack of clarity in terms and conditions of BNPL providers, and the risk of customers borrowing more than they can afford and ending up being subject to high fees or interest rates, which can negatively affect their credit ratings. 

With a majority of BNPL loans falling under EUR 200 and thus evading the EU legislation on consumer credit loans, there is an incentive to better regulate BNPL across EU member states. According to a recent study, 16 EU countries require the authorization of the supervisory body to start a consumer credit business offering BNPL, 5 countries only require an entry in a special registry, and only 3 countries don’t require authorization nor registry entry.

As European Commission seeks to achieve better compatibility between national regulations of member states, proposed updates to existing regulations aim to ensure an enhanced assessment of consumer payment ability, better accessibility and clarity of information on loan terms and conditions, and a possible introduction of caps on interest rates.

Implications of Regulatory Changes

The biggest obstacle to buy now, pay later’s continued rise is uncertainty surrounding national and international regulations. However, BNPL providers seem to be working out ways to get around any potential regulatory issues.

According to one buy now pay later industry analysis, we might see more collaborations between fintech offering BNPL services and the banks who already have both the necessary licenses and the customers.

One of the biggest BNPL service providers in Europe (and wider), Klarna already has a banking license in its native Sweden. Another provider, Zilch, has a license from UK’s Financial Conduct Authority. Twisto, with its growing market share in the highly regulated CEE region, could find its way into the regulatory landscape through strategic partnerships, as could other providers.

How do BNPL Companies Manage Risk?

As with all payment methods, buy now pay later is susceptible to certain risks – from identity fraud, identity theft, and account takeover fraud (ATO) all the way to illegitimate merchants collecting payments from BNPL companies. BNPL businesses have to secure the transactions and safeguard customer data, all without complicating the customer experience.

The buy now, pay later risk management solutions reduce fraud risks through customer checks that include both verifying their true identity and making sure that they are a trustworthy customer. BNPL loans are relatively low compared to credit card and bank loans, making the risk lower, too.

In checking the reliability of both the customer and the merchant, BNPL’s fintech solutions can look at real-time data as well as previous data, including financial information. In mitigating financial risk, a reliable payment solutions provider can prove to be a valuable partner to BNPL businesses, as fraud risk management already forms an integral part of their service.

As a flexible payment method in economically precarious times, the BNPL business model is on its way to becoming a standard in the world of e-commerce. And while international regulation seeks to better protect consumers, the BNPL providers seem to be quickly adapting to the challenges, safe in knowing that the consumer demand is on their side.

Interview with:

Nina Pütz

Ratepay CEO

1. From a merchant’s perspective, how does offering BNPL options affect their business, sales, and customer loyalty?

The implementation of Buy Now, Pay Later (BNPL) offers numerous benefits to merchants. As BNPL gains popularity, it now accounts for 47% of online payments in Germany, and the upward trend continues. Merchants who don’t offer this option risk losing customers due to purchase abandonment. Research also shows, that BNPL leads to an increase in shopping cart values, as customers appreciate the flexibility to pay later, resulting in larger purchases.

Moreover, BNPL proves to be a game-changer in fostering customer loyalty, as online shops offering this payment method are highly favored by customers. Specifically, white label solutions play a crucial role in building trust. During checkout, customers remain in the online shop’s brand environment, creating a direct association between financial security and the brand. With all transactions occurring within the merchant’s shop, without involvement from third-party providers or redirection to external sites, a seamless and trustworthy shopping experience is ensured for customers.

2. BNPL providers often partner with merchants to offer their services at checkout. How do these partnerships work, and how do they benefit both the BNPL companies and the retailers?

Ratepay is Europe’s number one white label payment provider, managing all processes from payment to customer service behind the scenes, including risk management. Our primary goal is to support the merchant’s growth – as the merchant’s revenue increases, Ratepay benefits as well.

With our flexible features and modular system, we can adapt our offering to meet the specific needs and business model of each individual merchant.

Finally, a successful BNPL provider fosters strong relationships with their merchants. At Ratepay, a healthy partnership with our merchants is of utmost importance to us. We achieve this, for example, by giving them full transparency over transaction data, having regular check-ins with a dedicated Key Account Manager and/or quarterly business reports. We closely monitor the relationship through our internal merchant NPS (mNPS).

3. As the BNPL space becomes more competitive, what are some key features or strategies that you use at Ratepay to differentiate from others?

We prioritize simplicity and transparency in our services. As a White Label provider, we put the merchant’s brand at the forefront, enhancing the customer relationship. Our business model revolves around risk management, where we fully cover the credit and fraud risks, rather than generating leads

We do not engage in up-selling or cross-selling other products, and we do not commercialize customer data. Our focus is solely on providing a secure and trustworthy platform for our merchants and their customers.

4. As BNPL becomes a global phenomenon, are there any regional or cultural differences in how consumers and regulators perceive and approach these services?

Across the globe, different countries have dominant providers offering buy now, pay later products and services. In the D-A-CH region, we proudly stand as a leading payment provider, while in the USA and the UK, Klarna and Afterpay have gained significant prominence. The Nordic countries have obviously shown a preference for Klarna.

Germany already boasts relatively strict norms when it comes to BNPL. With the EU’s planned regulation, this trend is expected to further expand throughout Europe. In contrast, the USA currently lacks any specific regulations for BNPL.

Cultural differences play a significant role in the adoption of BNPL, of course. In Germany, BNPL has been an established payment method for over 70 years, with Otto pioneering the ability to pay via invoice. Otto holds a special place in German culture and has contributed to the early popularity of BNPL in the country.

Moreover, studies have shown that cultural factors such as individualism and the pursuit of security influence the usage of BNPL. Countries with a strong emphasis on individualism tend to opt for direct payment, as seen in the UK. On the other hand, countries placing high value on uncertainty avoidance prefer receiving the product before making the payment, as exemplified in Germany.