The lack of regulation of Buy Now, Pay Later (BNPL) has exposed vulnerable consumers around Europe to over-indebtedness, as a result of abusive fees and charges. The revision of the EU Consumer Credit Directive is a once-in-a-generation opportunity to regulate BNPL in the same way as other forms of credit.
BNPL products are marketed as the "cost-free" alternative to consumer credit, which is misleading to say the least - late payment fees make up between 8% and 35% of BNPL companies' total revenues. These fees are a structural part of the market’s business model.
Late payment fees, by definition, hit the weakest consumers who could not afford to pay in the first place. With the BNPL market remaining outside of any regulation, late payments are aggressively pursued by market players.
When consumers are having trouble paying, everyone is losing out: merchants, consumers and ultimately, the deferred payments market. Merchants, as they lose repeated customers. Consumers, as they suddenly find themselves being treated as mere numbers. Ultimately, the market also loses as it has let down both merchants and consumers.
Some BNPL companies in the Netherlands charge as much as EUR 13.50 in late payment fees. For an average order amount of EUR 120-130, this represents more than 10% in a three-month period or more than 40% interest when annualised. The same practices are being applied to smaller purchases. For a smaller EUR 20 purchase, these late payment fees represent more than 50% of the initial order value – or more than 200% interest, when annualised.
200% interest for a BNPL purchase that:
Is allowed to be marketed free of charge;
Does not give any warning about potential consequences of not paying;
Will charge up to 200% late payment fees if payments are missed;
Is approved by nothing else than the rules the party giving the credit makes up itself;
Could be the 20th purchase for 150 EUR at the 15th company ; since there is no regulation to be applied to all BNPL services, customers can have a total outstanding of EUR 3,000 across any number of BNPL providers, with no company being forced to refuse crediting high-risk clients.
Has absolutely no regulatory oversight and, hence, operates in the dark.
So, is it really that bad? In the next 30 months over EUR 13 billion in late payment fees are going to be paid by the most vulnerable consumer in Europe.
EU policy makers are now discussing a legislative proposal to update Europe-wide rules on consumer credit. Giving that these revisions only happen every decade at best, this represents a unique opportunity to close existing loopholes and ensure that all players apply Consumer Credit protections to BNPL products.
Tinka’s plea to EU legislators is to not miss this opportunity and resist watering down provisions designed to protect the most vulnerable consumers. EU policy makers could adjust the current BNPL regulations and protect customers by following three specific recommendations:
Apply the full regime of the Directive, including creditworthiness assessment, to BNPL. An assessment of a borrower's ability to repay and afford a loan is an essential protection from over-indebtedness. There should be common rules that every party needs to adhere to. Without a requirement to carry out a minimum, directive assessment, lending decisions are no longer a factual examination of a consumer's ability to pay, but a commercial decision based on the BNPL company's risk appetite. Since every company has different ways to assess and a different risk appetite, imposing a strong set of rules deployed from the smallest credit value should be the norm to protect vulnerable customers.
Information about the risk of BNPL products must be prominent for the consumer. To be workable in a fast-paced online environment, a warning about the risks of BNPL products needs to be displayed before completing the purchase. This should also apply to advertising BNPL products. In addition, BNPL should never be allowed as a default payment option and should only be presented below direct payment options, allowing clients extra flexibility without adding additional financial pressure in the form of credit.
Do not delay the application of the new rules. With the explosive growth of BNPL and aggressive application of disproportionate late payment fees to the weakest consumers, the timeline for the application of new rules needs to reflect the urgency of the situation. During the proposed 24+6 months implementation period in the Commission proposal, we estimate that the most vulnerable consumers in Europe will have paid out more than EUR 13 billion in late payment fees. Legislators should ideally minimise this burden or, at least, ensure no further delay.
Throughout his career, Charly has founded, built, worked for, failed at, or sold several businesses around the world. But, above all, he is a strategist, people leader, geek, proper technology & data nerd, and networker at heart. Not necessarily in this order. He joined The Netherland's largest department store, an Apax Partners private equity portfolio company, as Group CTO in April 2016. Four years later, Charly took on the position of CEO of Tinka, the consumer finance business within the group, and carved it out successfully with the Tinka team.
Tinka is a deferred payments service provider based in the Netherlands, registered and authorised by The Netherlands Authority for Financial Markets (AFM). With more than half a century of experience in the deferred payments sector, we offer all deferred payment solutions to our merchant partners and their customers. Responsibly. These solutions include invoiced Buy Now, Pay Later, and different consumer credit options. www.tinka.com.
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