Buy now pay later (BNPL) is a credit product that has swept the e-commerce market. BNPL credit solutions tempt consumers with their simplicity, clarity of terms, and low costs. Deferring a payment by 30 days or even deferring it and spreading it over three installments is a relatively simple and transparent structure from the consumer’s point of view. The fee structure itself is also usually transparently stated. This is in stark contrast to the structure and nature of fees associated with, for example, using a credit card.
Popularity continues to grow
At the same time, BNPL is very often – at least on the Polish market – free of charge for the consumer as long as he repays the credit on time. In this case, the costs are covered by the merchant. They pay for the opportunity to provide deferred payment for the purchase of their products. It should not be forgotten how convenient this type of solution is. BNPL is usually available directly at the payment selection in the store. In addition, the entire process is relatively uncomplicated for a credit product. Even taking into account the legal requirements for creditworthiness and consumer identification, the procedures do not pose a major problem.
These features of BNPL determine its popularity. Younger consumers in particular have taken a liking to this option. This social group is inherently skeptical of complicated, more expensive, and less convenient credit products, such as the aforementioned credit cards.
Regulation – helping consumers?
In addition, retailers rarely advertise BNPL as a typical loan, even though most BNPL solutions are consumer credit. As a result, consumers often forget about the risks associated with excessive debt. This, in turn, affects the interest of legislators as well as market regulators in regulating BNPL more strictly. Therefore, the upcoming new regulations will have a significant impact on the possible BNPL offerings. Therefore, it is already worth taking a look at the draft legislation revising and amending the regulations governing consumer credit.
Revision of the EU consumer credit directive
Work is currently underway at the European Union level to revise the EU Consumer Credit Directive. There is no doubt that the current directive has become outdated and, according to many experts, does not meet today’s challenges.
Key changes
The draft of the new Directive on consumer credit introduces some key changes, in particular:
- A modification of the material scope of the Directive, including in particular the removal of certain exceptions that exclude the application of the Directive. These include exceptions for free credit and low-value credit repayable within 3 months (in Poland, only the first exception was implemented);
- Setting a limit on the cost of consumer credit. It will be up to the Member States to choose the type of cost limit. It is possible to impose an upper limit on interest rates, the annual percentage rate of charge (APR), or the total cost of credit for the consumer – and it is allowed to set a limit not only based on one of these criteria;
- Strengthening of the requirements relating to the assessment of consumer creditworthiness, with their adaptation to increasing digitalization and automation;
- New information requirements, in particular the obligation to prepare an additional one-page SECCO form. This document should contain the necessary information about the credit to make a decision;
- The obligation to actively provide information to the consumer, along with support in the credit decision-making process;
- New regulations on tying and bundling, i.e. selling additional financial services together with a loan. In principle, tying is to be prohibited. This means that offering credit in a bundle with other separate financial products or services when the credit agreement is not available to the consumer separately will, in principle, constitute an illegal practice.
Polish legislative initiatives on consumer credit
Poland is also currently working on amendments to the Consumer Credit Act and other related laws in parallel with the regulatory review process at the EU level. First of all, after a long period of concealment, the Anti-usury Act has finally been published in full.
What does the document provide for?
- Introduction of a legal definition of non-interest costs of granting monetary benefits;
- Radically lowering the maximum non-interest costs of granting consumer credit, inter alia, for credit with a credit period of more than 30 days. It may then fall to 10% of the initial cost and 10% of the cost depending on the loan term. The non-interest credit cost in total will not be allowed to reach more than 45% of the total credit amount;
- Regulation of cash loans granted to an individual that does not constitute consumer credit. Also, the establishment of a separate limit for the amount of non-interest credit costs;
- Restrictions on the use of certain cash loan repayment collateral;
- Significant changes to the assessment of consumer creditworthiness and the establishment of additional requirements and obligations. Obligation to obtain information about the consumer’s income and expenses, and an obligation for the creditor to verify this information;
- Subjecting lending institutions to full supervision by the Financial Supervision Commission;
- Changes in the conduct of business by lending institutions. Requirement for loan institutions to operate as a joint-stock company. Increasing the minimum share capital of credit institutions to PLN 1 million. Prohibition on financing the operations of these institutions from bond issues or other debt instruments and undocumented sources.
One should not forget about the second bill amending the Consumer Credit Act, the so-called Senator Lidia Staroń’s bill. Here, the maximum non-interest costs of granting a loan are further reduced. In addition, the bill mentions the necessity to recalculate the costs of loans already granted and not repaid. Thus, the number of costs charged should correspond to the new, lower limits.
Regulatory trends in BNPL
The above legislative initiatives assume many changes concerning the rules governing consumer credit. Undoubtedly, also a large part of them will be crucial for BNPL products. Currently, both the revision of the EU directive and the Polish draft amendments to the Consumer Credit Act is at a relatively preliminary stage of the legislative process. Therefore, it will take a long time before both drafts are introduced. The final scope of changes may differ from current assumptions. Especially for the Polish bills, there is no guarantee that they will be adopted at all. Senator Lidia Staroń’s initiative, as a non-governmental project, is unlikely to gain support. The draft of the anti-claims law was very negatively received by the market, as well as by the relatively negative opinions of the Office of Competition and Consumer Protection and the Polish Financial Supervision Authority.
Nevertheless, some trends can already be noticed, which should remain valid. They will have a significant impact on buy now pay later products:
Full coverage of BNPL by consumer credit regulations
Currently, it is possible to offer BNPL solutions based on various types of exceptions. For example- in Polish reality, there is an exception for free credit. However, there is now a trend that all BNPL solutions should always be offered in the form of consumer credit with all its consequences. Exceptions, as well as existing gaps in this area, will probably be gradually eliminated.
Tightening of regulatory requirements for non-bank lenders
This trend is visible in Poland. It manifests itself in stricter requirements for the functioning of lending institutions in terms of the form of their activity, financing, and supervision. There is no doubt that lending institutions are the basic form of conducting BNPL business in Poland. Radical tightening of these requirements in the draft amendments to the Polish Act on consumer credit and placing the activities of lending institutions under full KNF supervision will be of key importance for the BNPL market in Poland;
Tightening of requirements concerning creditworthiness assessment
Due to its nature, BNPL is usually used to finance relatively small purchases of low value. Thus, there is a temptation on the part of lenders to simplify the creditworthiness assessment for BNPL-type credit products. In addition, the digital nature of BNPL involves the increasing use of scoring models and more sophisticated artificial intelligence-based solutions. However, there is already a trend towards tightening consumer credit scoring requirements and regulating the new technologies used for this purpose, particularly AI. The potential requirement to obtain data on consumer spending and income in the BNPL process (much less additional verification of this data) will dramatically complicate the loan origination process. Moreover, such a change is likely to be associated with a dramatic increase in the cost of creditworthiness assessment.
Clarifying and strengthening the requirements for the provision of information to the consumer on consumer credit and its costs
Although in the current state of the law the creditor is required to provide some detailed information about the credit in an appropriate form, there is a trend towards further tightening of the requirements in this respect. In the case of BNPL, which is usually granted in connection with the purchase of products (very often made via mobile devices), this may result in the consumer being overwhelmed with excessive information. On the part of the lender, it will then become difficult to provide all the necessary information and documents without over-complicating the lending process.
Establishing proactive requirements for the creditor to provide information and support to the over-indebted consumer
These requirements, once established, can be critical to BNPL’s established loan origination and servicing processes. The premise behind BNPL is that these processes should be as simple and automated as possible. However, implementing the requirements may prove difficult to automate and costly.
Establish additional regulations for the provision of other related financial services along with consumer credit
The above changes may affect the so-called subscription model of BNPL, where the service is only part of a package of financial services offered under a paid subscription.
Limitation of maximum credit costs
In Polish reality, this trend is nothing new – due to the already binding regulations on maximum non-interest costs of consumer credit. Nevertheless, the trend is to further reduce the limit of such costs to a level that raises doubts as to the continued viability of many lending businesses operating in Poland. It should also be remembered that the above changes reducing the profitability of credit products go hand in hand with a plan to significantly increase the costs of loan institutions and the provision of credit services. This, in turn, may mean “to be or not to be” for BNPL products, which currently tempt consumers with low prices.
Biggest hurdles
From the point of view of buy now pay later lending products, the most painful changes are those that will directly affect the strongest features of BNPL: simplicity, transparency, and low costs. Without a doubt, therefore, any changes that complicate the lending process itself, and in particular those relating to creditworthiness assessment, will be very acute. Also of key importance for the future offer of BNPL will be any changes that increase the cost of granting a loan, as well as those that reduce the maximum amount of fees charged for granting a loan or its servicing. In turn, due to the dominant share of non-bank entities in BNPL’s offer in Poland, any regulations affecting these institutions will also have a significant impact on BNPL’s offer. Especially those changes that are so severe and far-reaching as those presented in the draft of the so-called anti-banking bill.
The future of BNPL
Going forward, some of the changes introduced to consumer credit could have a key and sometimes negative impact on BNPL products. Much of the trend presented is unstoppable. Indeed, there is growing pressure to further increase consumer protection. Both at the European and national levels.
Will this mean the demise of BNPL? Probably not, but for sure BNPL providers will have to adapt to new business conditions and a growing number of obligations. These changes may also contribute to the need to interfere in the structure of products offered and the fees charged. Contrary to assumptions, this may therefore mean an increase in fees paid by consumers themselves.
Banking sector players may also enter the BNPL market more broadly. At present, they are not competitive due to the more far-reaching requirements for the lending process. It can be noticed especially in the area of creditworthiness assessment (among others due to EBA guidelines and Recommendation T issued by KNF).
One can only hope that the changes adopted, if any, will not be as severe as those currently planned. This applies mainly to ill-considered Polish legislative initiatives. According to experts, they do not meet the needs of the market. As a result, their possible introduction will harm the entire lendtech and fintech sector in Poland – and thus on the offer of BNPL.
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