Introduction
In recent years, boosted by the changing consumer habits in the wake of the COVID-19 pandemic, the e-commerce sector has experienced an exponential growth. This new environment has created particular fertile breeding ground for the rapid emergence of a new consumer financing model that is getting ever more popular, the so-called Buy-Now-Pay-Later (BNPL). Introduced first by financial technology firms (FinTechs), BNPL has rapidly become one of the most frequently used payment options in the e-commerce ecosystem promising the convenience and flexibility for consumers around the world.
In a nutshell, BNPL is a point of sale loan provided by the BNPL provider that enables consumers to purchase goods (usually online) with a simultaneous postponement of the payment date – for instance within 30 days as of the date of purchase. In a typical BNPL structure, once the consumer creates the purchase order and chooses BNPL as a payment option, at the point of sale the BNPL provider pays to the merchant for the product instead of the consumer. By doing so, the BNPL provider basically grants a credit to the consumer which is usually interest free conditional upon the consumer repaying the borrowed amount within the agreed period. Many consumers around the world, have started to use BNPL as a payment option of preference during the COVID-19 pandemic given that this gave them a chance to pay for the goods purchased online, after they receive and inspect them or eventually not pay at all should they decide to return the purchased goods to the merchant.
And while the e-commerce market was fast in adopting this new consumer financing model, the laws and regulations regulating the credit agreements, did not adapt at the same pace to this new environment leaving a space for license free operation of BNPL providers in many EU Member States.
Current situation in the EU
When it comes to regulation of BNPL providers, the current state of the EU financial regulatory framework is far from harmonized. The existing regime based on the Consumer Credit Directive, generally does not apply to the most common credit structures that BNPL providers are using. This is particularly the case with credit agreements involving a total amount of credit less than EUR 200 as well as credit agreements where the credit is granted free of interest and which has to be repaid within three months.
Further, national regulations of individual EU Member States also provide for specific exceptions to the application of consumer credit regulations to BNPL providers, in particular when it comes to provision of interest-free loans, small value loans as well as short-term loans.
However, even under existing framework, BNPL providers are not able to operate in every EU Member State without a license. Namely in Germany, where strict rules around the granting and taking of loans of any kind (including interest free loans) apply, BNPL providers are not able to provide their products to customers without triggering application of existing regulations. Namely, with the aim of avoiding application of strict regulatory requirements applicable to provision of credit (Kreditgeschäft), BNPL providers operating in Germany are frequently relying on a less onerous framework that applies to factoring firms under German law. In this structure, the BNPL provider basically acquires the merchant’s payment claim against the customer, pays the online merchant immediately, and allows the consumer to pay the amount owned later or in installments. Where an ongoing cooperation between the merchant and the BNPL provider exist in this structure, this generally constitutes factoring within the meaning of the German Banking Act (Kreditwesengesetz “KWG”), an activity for which special license issued by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht “BaFin”) is needed.
As the awareness of the risks that BNPL structures may pose to consumers started to rise, some EU Member States have started to amend their national legislation with the aim of bringing BNPL providers under the scope of application of financial regulation. For Instance, in Ireland, BNPL providers were up until recently exempt from the supervision and regulation by the Central Bank of Ireland given that the interest-free deferred payment structures were falling outside the definition of “credit” set out in the Central Bank Act 1997. However, on 16 May 2022, the Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Act 2022 was commenced that aims to bring the BNPL providers under the scope of Irish financial regulation. The Act expands the definition of “credit” in the Central Bank Act 1997 by including within the definition “deferred payments” and “other similar financial accommodation” alongside cash loans. The provision of indirect credit is also within scope for the new Act for the first time which (among other) refers to the provision of credit by BNPL providers.
Revision of the Consumer Credit Directive
As part of its New Consumer Agenda launched in November 2020, on 30 June 2021 the European Commission adopted a legislative proposal that shall revise the existing Consumer Credit Directive. As a rationale for the proposed change of the existing regime, the Commission has pointed out that certain credit agreements that currently fall outside the scope of the existing Consumer Credit Directive, like short-term high cost loans whose amount is typically lower than the minimum threshold of EUR 200, can be detrimental for consumers, and as such shall be brought under the scope of existing rules applicable to credit providers. In the Commission’s view, other potentially detrimental products for consumers can also be interest free loans, that in the case of missed payment, can entail high fees or interest for consumers and as such, shall be equally regulated under the existing regime applicable to credit providers.
Against this backdrop, the Commission has concluded that these types of credit arrangements that BNPL providers are using, should be covered by the revised Directive, to ensure increased transparency and better consumer protection, resulting in higher consumer confidence.
Under the published proposal, the Commission is proposing significant expansion of the scope of application of the existing regime to:
- credit agreements under EUR 200 and up to EUR 100 000;
- leasing agreements that have an option to purchase goods or services (e.g. certain motor finance products);
- credit agreements where the credit is granted free of interest and without any other charges; and
- credit agreements under the terms of which the credit has to be repaid within three months and only insignificant charges are payable, capturing buy-now pay-later (BNPL) products.
Under the new rules, the BNPL providers will be required to ensure that consumers have easy access to all necessary information about the credit and its total costs, especially in digital and smart device friendly format that enables consumers to read all information contained in an advertisement or pre-contractual documentation. Further the BNPL providers will be required to assess the consumer’s ability to repay the credit (ex-ante), by taking into account the consumer’s interest and based on necessary and proportionate information on the consumer’s income and expenses and other financial and economic circumstances.
On 2 December 2022, the Council and the Parliament announced that they had reached provisional political agreement on the revised text of the proposal. However, at the time of writing of this publication the revised text is still not published.
Outlook
With the proposed revision of the Consumer Credit Directive, which shall include introduction of the light-touch framework of BNPL providers, the EU Commission aims to achieve more harmonization in regulation of credit providers operating in the EU that shall enable all consumers in the EU to enjoy a high and equivalent level of protection of their interests within the well-functioning EU Single Market for financial services.
Despite being the first major jurisdiction that is openly looking to regulate BNPL sector, the EU does not appear to be alone in this race. For instance, in the UK, where BNPL models generally fall outside of Financial Conduct Authority (FCA) regulations, the Government is looking to amend the Consumer Credit Act 1974, with the aim of requiring BNPL providers to obtain FCA authorization and comply with the number of regulatory requirements when offering BNPL products to the UK customers.
And despite the increasing regulatory scrutiny, more companies are looking to include BNPL products as part of their service with the aim of joining FinTech firms in the battle for customers interested in BNPL as a payment option. In June 2022, Apple has announced that it will soon be launching a new payment option 'Apple Buy Later', as part of their IOS 16, which shall allow their users to spread the cost of a purchase into four payments over six weeks. This type of initiatives together with the proposed regulatory framework that shall apply to all BNPL providers across the EU, may encourage more traditional banks to try entering into the space and to start testing this type of consumer credit product on their huge customer bases in the coming period.
Nonetheless, it is yet to be seen once the revised Consumer Credit Directive becomes operational, what practical impact will the new rules have on existing BNPL providers as well as new firms that are entering into the space in the coming years.
