Buy Now Pay Later (BNPL) Under Turkish Law

"A Noteworthy Financing Method"

About the BNPL System

Rapid developments in the field of financial technology are producing highly innovative outcomes, particularly with respect to "payment systems and payment methods." One of these outcomes is the "Buy Now Pay Later" business model, which in Turkish is rendered as "Şimdi Al Sonra Öde."

In this study, we will first define Buy Now Pay Later (referred to hereinafter as "BNPL") and then examine the nature of BNPL contracts under our law.

What Is Buy Now Pay Later ("BNPL")?

In summary, BNPL is defined as "a financing method that enables payment for a purchased good and/or service to be deferred for a specified period or made in installments."

Within the scope of BNPL, various payment options are offered, chief among them installments, payment deferral, and cash on delivery. Of these, it is fair to say that the installment payment method is the best known and most preferred option.

In practice, BNPL is most commonly encountered on e-commerce sites. E-commerce sites can offer this facility to consumers within their own online marketplaces, or, by reaching agreements with suppliers, they may include this payment method among the payment options presented at checkout.

The Legal Nature of BNPL Arrangements

In a BNPL arrangement, a lending facility is provided to the purchaser. This sometimes takes the form of installment payment and sometimes the form of payment deferral. For this reason, the types of contract that first come to mind in relation to a BNPL arrangement are:

• Financing Agreement
• Installment Sales Agreement
• Consumer Loan Agreement

Financing Agreement

A "Financing Agreement" is a type of loan agreement that enables payment to be made directly to the seller, together with the delivery or supply of a good or service, in the name and on behalf of the real or legal person purchasing that good or service. Before a Financing Agreement is concluded, it is mandatory that a general framework agreement be concluded between the seller and the financing company.

After the person seeking the loan reaches an agreement with the seller regarding the sale of the good/service, that person applies for a loan to the financing institution with which the seller has an arrangement; once the loan is approved, a "financing agreement" is established between that person and the financing company.

The distinctive feature of a financing agreement is that the loan is conditional upon financing the acquisition of a good or service. It is by virtue of this feature that it is distinguished from general-purpose (need-based) loans. In other words, a financing agreement necessarily requires a prior sales or service contract (concluded between the seller and the person seeking the loan). Under a financing agreement, the financing institution pays the loan amount (which is at the same time the sale price) directly to the seller, while loan repayments are made by the financed person to the financing institution at the maturity dates determined by the parties.

Finally, in order to constitute the lender party of a financing agreement, a "Financing Company" license is required.

Financing Agreements (Law No. 6361)

Financing agreement - ARTICLE 39

(1) A financing agreement is an agreement providing for the financing of any purchase of a good or service by way of making payment directly to the seller, together with the delivery or supply of the good or service, in the name and on behalf of the real or legal person purchasing that good or service. Loan repayments are made to the financing companies by the persons in whose name the loan is opened.

(2) Financing companies are required to conclude, in advance, a general agreement in writing or at a distance through the use of remote communication tools, with the sellers who supply the goods or services to be financed.

(3) A financing agreement is drawn up so as to be established in writing, or at a distance through the use of remote communication tools, or—whether at a distance or not—through methods which the Board has determined may take the place of the written form and which are carried out via an information technology or electronic communication device and permit verification of the customer's identity. The Board is authorized to determine the procedures and principles concerning the application of this paragraph.

Installment Sales Agreements

"Installment sales agreements" are regulated both in the Turkish Code of Obligations (TBK) No. 6098 and in the Law on the Protection of the Consumer (TKHK) No. 6502.

An installment sales agreement is defined in Article 253, paragraph 1 of the TBK as follows: "A sale by installments is a sale in which the seller undertakes to deliver the sold movable to the buyer before payment of the sale price, and the buyer undertakes to pay the sale price in parts."

Installment sales agreements (Law No. 6502) - ARTICLE 17

(1) An installment sales agreement is an agreement in which the seller or provider undertakes to deliver the good or perform the service, and the consumer pays the price in parts.

(2) The provisions of this Part also apply to financial leasing agreements in which the consumer is obliged to acquire ownership of a good at the end of the lease term.

(3) An installment sales agreement is not valid unless it is established in writing. A seller or provider who has failed to conclude a valid agreement cannot subsequently assert the invalidity of the agreement to the detriment of the consumer.

Consumer Loan Agreements

A consumer loan agreement means an agreement whereby the lender grants, or undertakes to grant, credit to the consumer in return for interest or a similar benefit, by way of deferral of payment, a loan, or similar forms of financing. Viewed from this perspective, it is considered that the consumer loan agreement may be widely used in BNPL arrangements.

The parties to a consumer loan agreement are the bank and the consumer. In this respect, just as the lending bank is not a party to the agreement relating to the transaction it finances, the seller/provider is likewise not a party to the loan agreement. There are two contractual relationships whose parties and subject matters differ from one another: the sale or service agreement, and the consumer loan agreement.

Consumer loan agreements (Law No. 6502) - ARTICLE 22

(1) A consumer loan agreement means an agreement whereby the lender grants, or undertakes to grant, credit to the consumer in return for interest or a similar benefit, by way of deferral of payment, a loan, or similar forms of financing.

(2) Credit card agreements are treated as consumer loan agreements where, in return for interest or a similar benefit, payment is deferred for more than three months or a similar facility for payment by installments is provided. However, in such a case the interest rate to be applied cannot exceed the rate determined under the credit card agreement.

(3) A consumer loan agreement is not valid unless it is established in writing. A lender who has failed to conclude a valid agreement cannot subsequently assert the invalidity of the agreement to the detriment of the consumer.

Assessment of BNPL Agreements Under Turkish Law

When we look at BNPL agreements in practice, we see that there is no uniform type. Within this framework:

a) Where the party providing the customer with the installment payment or payment deferral service is a Financing Company, we may say that the BNPL agreement is in the nature of a "Financing Agreement." In practice, it is observed that financing agreements are also referred to as BNPL and that the good or service purchased is financed in this manner. In this case, the BNPL agreement will in essence be treated as a "Financing Agreement" and the provisions relating thereto will apply. However, attention must be paid to the following point: it is prohibited to extend financing (in the manner described above) without legal authorization, other than by a financing company. In such a case, the "Offence of Engaging in Unauthorized Activity" may arise.

b) Where the party providing the customer with the installment payment or payment deferral service is a bank and the transaction is also deemed a "consumer transaction," we may say that the BNPL agreement is in the nature of a "Consumer Loan Agreement." In this case, the provisions of the Law on the Protection of the Consumer will apply to the BNPL transaction. However, for this option the lender party must necessarily be a bank. Otherwise, the "Offence of Engaging in Unauthorized Activity" may arise. Where the transaction in which the customer is provided with the installment payment or payment deferral service is not deemed a "consumer transaction" or is not in the nature of a "practice directed at consumers," we may say that the BNPL agreement is a "Cash Loan Agreement."

c) Where the party providing the customer with the installment payment or payment deferral service is the seller or provider, we may say that the BNPL agreement is in the nature of an "Installment Sales Agreement," and that if this agreement is in the nature of a consumer transaction or a practice directed at consumers, the provisions set out in the TKHK will apply to this relationship, and if not, the provisions set out in the TBK will apply. Under this option, the lending party is not a financial institution (a bank or a financing company). In this case, the lender is the seller or provider party to the transaction. There is no impediment to the seller or provider selling in installments the price of the good or service it sells. However, if this installment transaction is carried out by a third party—one that has no legal authorization to extend credit—it may constitute the "Offence of Engaging in Unauthorized Activity."

Closing Remarks on the BNPL System

The BNPL arrangement is a payment method based on extending credit to the user. The essence of this method is the "spreading into installments/deferral" of a monetary debt arising from a sales transaction.

The party who will carry out this "installment arrangement/deferral" is either the seller/provider that is a party to the transaction, or a financial institution authorized to extend credit. The legal rules to be applied to this agreement will vary according to the lending party.

Finally, where the extension of credit is carried out—by a third party that has no legal authorization to extend credit—other than by these parties, the "Offence of Engaging in Unauthorized Activity" may arise.