Changing Landscape for ‘Buy Now, Pay Later’ Services: Consumer Credit Directive under Revision
The buy now, pay later services – or BNPL – have seen noticeable increase in demand as a result of a shift in consumers’ payment preferences towards a higher flexibility. Perhaps the best indicator of increasing interest of both consumers as well as merchants in BNPL is the attention of regulators. In June 2022 the European Council approved its position (general approach) on the revision of the Directive 2008/48/EC (CCD). The current proposal of the amendment to the CCD extends its scope significantly, among others, to buy now, pay later services with potentially market changing impact.
What is a Buy Now Pay Later (BNPL) Service?
The BNPL service, being essentially a point-of-sale financing, allows consumers to purchase products from a merchant and to pay for the purchased product at a later date (deferred payment) or in installments. The consumer receives a credit line directly from the BNPL service provider during the purchasing process, usually online, without using a bank account or a credit card. The merchant benefits from increased sales (conversion rate) and therefore the BNPL service provider’s fees are usually wholly covered by the merchant, while being free of charge to the consumer. On the other hand, if the consumer fails to pay the loan within agreed time, usually up to 30 days, then interest on late payment and/or late payment fees can increase significantly. The BNPL services are usually integrated within the e-commerce purchasing process on the website of a merchant, thus allowing consumers to use the BNPL service seamlessly within the purchasing process.
Is there a Specific Regulation of Buy Now, Pay Later (BNPL) Services?
At the EU level, the BNPL services are not specifically regulated. In its Article 2 (2) (f), the current CCD excludes from its scope credit agreements where the credit is repaid within three months and only insignificant charges are payable. Most BNPL services are offered under this exception, as non-consumer credit services and thus fall outside of the scope of the CCD. In practice, this allows BNPL service providers to offer BNPL services without having to administer formal and burdensome credit processing which is mandatory for typical forms of consumer credit. In other words, said regime allows the BNPL services to be offered seamlessly within the purchasing process without the consumer having to burdensome underwriting as it is in cases of typical consumer credit agreements.
It should be noted, however, that in most cases provision of the BNPL services encompasses provision of payment services (e.g., money remittance) under the Directive 2015/2366 (PSD2) and thus requires BNPL service operators to acquire a payment service license to operate. Getting a PSD2 license has a synergic effect on BNPL service providers because it simultaneously authorizes them to carry out payment services as well as to grant credit to a certain extent. The Article 18 (4) of the PSD2 allows BNPL service providers to grant credit if it is ancillary and is granted exclusively in connection with the execution of a payment transaction, is repaid within 12 months and is not granted from the funds received or held for the purpose of executing a payment transaction.
What is changing?
The EU plans to increase consumer protection by leveling playing field for BNPL service providers and traditional consumer credit businesses. The proposed revision of the CCD plans to extend its scope, most notably, to credit agreements where the credit is granted free of interest and without any other charges, as well as credit agreements under the terms of which the credit has to be repaid within three months and only insignificant charges are payable, including ‘Buy Now, Pay Later’ services. Should the new proposal of the CCD be adopted in full, the BNPL services will fall within the regulation of traditional consumer credit agreements. In such case, currently unregulated BNPL service providers, may need to secure a license to provide consumer loans (‘creditor license’) from supervisory authorities in each EU member state where they intend to operate. Furthermore, the BNPL service providers may also need to adapt lending processes to include standard credit checks, disclosure of mandatory pre-contractual information and redraft credit agreements to bring them in conformity with traditional consumer credit requirements. Therefore, the BNPL service providers should plan ahead to assess impacts of the proposed changes to the CCD on their specific business models to be able to adapt in time.
How can we help?
We can help you understand rules applicable to your business, analyze your product portfolio, assess impacts of the proposed revision of the CCD and bring your processes and standard documents in conformity with the newly applicable regulatory regime. In case your products fall within the scope of the revised CCD directive, we can assist you to successfully register ‘consumer credit’ license with the National Bank of Slovakia in advance to facilitate uninterrupted transition of your business to the enhanced regulatory regime.