The need to regulate Buy-Now-Pay-Later in Europe.
If something looks like credit, smells like credit, tastes like credit - it is credit.
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. Our CEO Charly Toni has prepared a paper summarising why Tinka believes this opportunity must not be missed.
Regulating Buy-Now-Pay-Later in Europe: if something looks like credit, smells like credit, tastes like credit - it is credit.
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. Let's make sure it is not missed.
Tinka's goal is to be the most recommended and responsible deferred payments partner in the Netherlands and beyond. As a responsible player in the BNPL market, we see first-hand too many loopholes in existing legislation which we refuse to exploit at the expense of the consumer.
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' revenues. These fees are a structural part of the 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.
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 is 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.
Tinka is already applying full consumer credit rules to our BNPL products. We follow the very straightforward principle: if something looks like credit, smells like credit, tastes like credit - it is credit, whatever name you give it.
EU policy makers are now discussing a legislative proposal to update Europe-wide rules on consumer credit. Considering that these revisions happen only every 15-20 years, this is once-in-a-generation opportunity to close existing loopholes and ensure that all players apply Consumer Credit protections to BNPL products.
My plea to EU legislators is the following: please do not miss this opportunity and resist watering down provisions designed to protect the most vulnerable consumers.
Here are my three specific recommendations:
1. 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. A creditworthiness assessment should assess 100% of applicants' expenses as well as their income. Tinka is already applying these assessments on an automated basis, within 60 seconds, without creating an unnecessary barrier to credit, and without storing any applicant's data. The cost of applying this assessment ranges between 50 cents and 1EUR. Without, a requirement to carry out this 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. The incentive for these companies is clearly to achieve the highest conversion rates and the consumer's ability to pay is secondary. Language in the legislation on "proportionality" in relation to creditworthiness assessments will merely provide cover for companies to maintain the status quo and put consumers at risk.
2. 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 at every step of a purchasing journey. This should apply to advertising as well as precontractual information. In addition, BNPL should never be the default payment option and should always be presented below direct payment options.
3. 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 expect that the most vulnerable consumers in Europe will have paid out more than 13 bn EUR in late payment fees. Legislators should ideally minimise this burden or at least ensure no further delay.
Regulating BNPL in the same way as any other form of credit will encourage responsible innovation and provide the necessary protection to those consumers who need it the most.