CJEU Ruling on Buy Now Pay Later Schemes in EU

On October 17, 2024, the Court of Justice of the European Union (CJEU) issued an important ruling in the case of Riverty GmbH v MI (Case C-409/23), which centered around the qualification of the popular buy-now-pay-later (BNPL) schemes under European Union consumer credit law. This case provides clarity on the interpretation of Directive 2008/48/EC, also known as the Consumer Credit Directive, which regulates credit agreements for consumers in the EU.

The case is significant because it delves into the question of how BNPL schemes, in which consumers make purchases and defer payments without paying interest or incurring substantial upfront fees, should be treated under EU credit regulations. Specifically, the CJEU explored whether such schemes should be classified as credit agreements and, if so, which costs and interest charges are to be considered in determining whether a credit agreement falls under the scope of the Directive.

Background of the Dispute

The case arose from a dispute involving Arvato Finance BV, which operated under the name AfterPay and was later succeeded by Riverty GmbH, a provider of a deferred payment service in the Netherlands. The provider offered a BNPL scheme that allowed consumers to defer payment for online purchases without incurring interest charges or significant upfront fees. Instead, consumers were required to pay a small processing fee of EUR 1.

In this particular case, the consumer, MI, used the service to purchase goods online. The agreement required MI to settle the payment within 14 days of receiving the invoice from AfterPay. However, MI failed to meet this deadline. As a result, AfterPay imposed administrative fees, statutory interest on the overdue amount, and a collection charge of EUR 40, which was the minimum amount stipulated by the service provider.

The dispute escalated when MI's failure to make payment prompted Riverty GmbH to initiate legal proceedings in the District Court of Arnhem, Netherlands, seeking enforcement of the payment obligation, including statutory interest and the collection costs.

Legal Questions and Referral to the CJEU

The District Court of Arnhem referred several key questions to the Dutch Supreme Court (Hoge Raad der Nederlanden) regarding the interpretation of Article 2(2)(f) of the Consumer Credit Directive. This provision excludes certain credit agreements from the scope of the Directive if they are free from interest charges and other significant fees, or if only minor charges are applied.

The referring court was tasked with determining whether the interest charged for late payment and the collection costs should be included in the “total cost of credit” as defined by Article 3(g) of the Directive. If these charges were deemed part of the “total cost of credit,” the agreement might fall under the scope of the Consumer Credit Directive. Conversely, if the charges were not included, the agreement might not be subject to the Directive’s provisions.

Given that the total amount of the credit agreement was under EUR 200, and that the Consumer Credit Directive allows for its applicability to credit agreements involving amounts below this threshold, the national laws of the Netherlands extended the Directive’s scope to agreements of this nature. As a result, the question arose as to whether the deferred payment scheme and the associated charges should be classified under the broader umbrella of consumer credit regulation.

The CJEU’s Analysis of the Case

The CJEU focused on interpreting key aspects of the Consumer Credit Directive to determine whether the charges associated with BNPL schemes should be included in the assessment of whether an agreement is considered a credit agreement under EU law.

Interest and Charges Under the Consumer Credit Directive

The CJEU emphasized the importance of consumer protection in credit agreements. The Consumer Credit Directive was designed to ensure that consumers are adequately protected when entering into credit agreements. The Court underscored that any exemption under Article 2(2)(f), which excludes credit agreements with negligible interest or charges, must be interpreted narrowly to uphold this consumer protection framework.

In the Riverty GmbH v MI case, the Court considered whether interest charged for non-payment and collection costs should be classified as part of the total cost of credit. The CJEU observed that interest and default charges related to overdue payments clearly fall within the category of costs that affect the overall cost of credit to the consumer. This interpretation is consistent with the Directive's goal of providing transparency and clarity about the true costs of borrowing, particularly when consumers enter into agreements that might have long-term financial consequences.

The Court noted that the Directive does not explicitly define the terms “interest” and “other charges,” and thus, it referred to various language versions of the Directive for clarity. Despite the lack of a formal definition, the Court concluded that both the default interest and the collection fees must be considered when calculating the total cost of credit to the consumer.

The Role of Default Charges in the Credit Agreement

Another central issue discussed by the CJEU was whether default charges incurred due to late payment should be considered part of the credit cost, even though these charges arise after the conclusion of the credit agreement.

The Court reaffirmed that the total cost of credit should include all charges that were foreseeable at the time the agreement was concluded. However, charges related to a consumer’s non-performance, such as late fees or collection costs, were not anticipated at the time the agreement was signed. As a result, such charges should not be included in the calculation of the annual percentage rate of charge (APRC), which is used to assess the total cost of credit.

The CJEU also made it clear that, although late payment charges may constitute a form of interest, they should not be considered part of the initial interest or charges that fall under the exclusion in Article 2(2)(f) of the Directive.

The Creditor’s Business Model and Non-Payment Anticipation

The referring court also raised concerns about whether the business model of the creditor, Riverty GmbH, involved an implicit expectation of consumer non-payment. The CJEU, however, left this question to the national court, indicating that it is for the referring court to assess whether Riverty GmbH's charges were anticipatory in nature, reflecting a business model that assumed defaults from the outset.

The Court ruled that, in principle, interest and collection costs would not be classified as part of the credit agreement unless there was clear evidence that the creditor intentionally structured the agreement in such a way as to anticipate defaults at the time of agreement formation. This aspect of the case reflects the need to preserve the protective intent of the Consumer Credit Directive while balancing commercial interests.

Conclusion of the CJEU's Ruling

The CJEU concluded that interest charges and collection costs imposed due to non-payment do not fall under the terms “interest” and “other charges” as outlined in Article 2(2)(f) of the Consumer Credit Directive, unless the creditor structured the credit agreement to anticipate defaults from the beginning. In general, such costs do not count toward the total cost of credit, and therefore, these agreements may not automatically fall under the scope of the Consumer Credit Directive. However, the Court acknowledged the dynamic nature of credit agreements and consumer protection, indicating that the national courts must continue to assess these agreements carefully to ensure consumer rights are not undermined.

The ruling has important implications for the BNPL industry in the EU, clarifying the treatment of late fees and other charges that may arise during the course of a credit agreement. It also serves as a reminder to creditors to ensure that their business models remain compliant with the stringent requirements of EU consumer protection law.

FAQs

What is the main topic of the CJEU's ruling in Riverty GmbH v MI?
The CJEU ruled on the classification of Buy-Now-Pay-Later (BNPL) schemes under the Consumer Credit Directive, focusing on whether late fees and interest should be considered part of the total cost of credit.

What is a Buy-Now-Pay-Later scheme?
A Buy-Now-Pay-Later scheme allows consumers to make purchases and defer payment, usually without incurring interest or substantial upfront fees.

What is the Consumer Credit Directive?
The Consumer Credit Directive is a European Union regulation that governs consumer credit agreements, ensuring a high level of consumer protection and transparency about credit costs.

How did the CJEU interpret interest and charges in BNPL schemes?
The CJEU ruled that late payment interest and collection costs do not count as part of the “interest” and “other charges” under the Consumer Credit Directive, unless the creditor anticipates non-payment from the outset.

What role do default charges play in determining credit costs?
The CJEU clarified that default charges for late payment are not part of the total cost of credit unless they were foreseen at the time the credit agreement was concluded.

How does the ruling affect the BNPL industry?
The ruling clarifies how BNPL schemes are classified under EU law and whether late fees and other charges fall within the scope of the Consumer Credit Directive.

What is the significance of the ruling for consumer protection?
The ruling emphasizes that exemptions from the Consumer Credit Directive must be interpreted narrowly to ensure strong consumer protection in credit agreements.

How does the ruling impact the calculation of the Annual Percentage Rate of Charge (APRC)?
The CJEU ruled that default charges are excluded from the APRC calculation since they are not part of the agreed-upon costs at the time of contract formation.

Is the ruling relevant for all types of consumer credit agreements?
While the ruling primarily concerns BNPL schemes, its interpretation of interest and charges could be relevant for other types of credit agreements governed by the Consumer Credit Directive.

What should creditors consider in light of the CJEU's ruling?
Creditors offering BNPL services or similar credit arrangements must carefully assess their business models to ensure compliance with the Consumer Credit Directive and avoid circumventing its protective framework.