On 28 October 2022, the Bank of Italy (“BoI”) issued a communication (“Communication”) on Buy Now Pay Later schemes (“BNPL”) to draw the attention of consumers on the prevalent forms of BNPL on the Italian market, the related potential risks and the means of protections afforded to customers by banking transparency regulations.
Currently, Italy has not implemented an overarching regulation for BNPL and, therefore, the applicable rules and the relative protections depend on how the transaction is implemented in practice with the result that the assessment is carried out on a case-by-case basis.
Forms of BNPL
According to the Communication, under the traditional BNPL scheme: (i) three parties are involved: the consumer (i.e. the purchaser of goods and services), the seller and a third party, who, on the basis of an agreement with the seller, allows the consumer to defer payment, even by instalments; (ii) amounts are usually relatively small and can be offered either online or in physical stores; (iii) no interest or charges are envisaged to be paid by the consumer (though penalties are due in the event of late or non-payment); (iv) simplified or no creditworthiness assessment is conducted.
Often, such deferred payment is granted directly to the consumer by a bank or financial intermediary, which intervenes in the transaction by virtue of an agreement with the seller. It being understood that the inclusion of a bank or a financial intermediary in the scheme is not strictly necessary (as the scheme benefits from an exemption from the consumers’ credit license requirements).
A variation to this traditional BNPL scheme may contain elements mentioned under points (ii) and (iii) above, namely, if relevant sums amount to at least EUR 200 and a fee is paid by the consumer. The presence of these elements would qualify the activity as consumer credit thus triggering the application of banking transparency regulation (aimed at ensuring adequate level of clients’ protection).
The Communication further illustrates an additional BNPL model, which, in the absence of interest or other charges on the client, combines: (a) a payment delay granted to the consumer directly by the seller at the time of sale, immediately followed by (b) a transfer of such payment delay (which the BoI qualifies in terms of “receivable transfer”) from the seller to a bank or financial intermediary. Usually, the possibility for the seller to execute such transfer is already foreseen in the contract between seller and consumer.
Contrary to the traditional scheme qualifying as consumer credit (either when implemented directly by a bank or a financial intermediary or because the variation of certain key elements occurred), in the context of this additional form of BNPL model, banking transparency regulation and BoI’s supervision do not apply.
The absence of a comprehensive regulation of BNPL may pose a number of risks to consumers.
The ease of access to BNPL products and the fact that BNPL is usually relied upon to purchase goods and services for small amounts could encourage purchases that are not fully conscious and, therefore, potentially not sustainable for the client, exposing him/her to a risk of over-indebtedness.
As for the overall clarity of the contractual relationship, where BNPL is built as a combination of payment deferral and subsequent credit transfer, the client may not be in a position to clearly identify its counter-party (particularly with regard to the payment aspect of the sale of goods or services). Besides, the sellers’ role as intermediary in the transaction may result in the consumer being misled into believing that the safeguards typically available in a bank-client relationship apply.
Finally, uncertainty on the qualification of a BNPL initiative may generally affect the profitability of the business and market participants may need to rely on a specific assessment thus reducing flexibility in their operational arrangements.
The means of customer protections: a way forward
At present, the fragmentation of the regulatory landscape may be perceived as detrimental to clients. Indeed, while some models of BNPL are highly regulated, others are not. In certain cases, for comparable business models, companies may end up being subject to banking transparency regulation and BoI’s supervision or be fully exempted.
However, the increasing diffusion of BNPL initiatives are pushing regulators to seek a clear and stable reply. A good opportunity may be the current review of the European Directive on consumer credit contracts (2008/48/CE), as the renewed Directive may include all or part of BNPL within its scope of application. This would also create a level playing field across Europe, and lower compliance costs for BNPL operators and merchants alike.