- In June 2021, the European Commission presented a draft new directive regulating consumer loans. The proposal aims to replace the existing 2008 consumer credit directive.
- Currently, the fastest growing feature in e-commerce is the buy-now-pay-later option.
- Some of the Directive’s proposals could significantly impede the use of this service by consumers.
– We see the need to review the provisions on consumer credit and adapt them to the new needs linked to the digital transformation. However, we note that some provisions of the new directive may hinder the dynamic development of companies in the FinTech industry in Europe and be unfavorable to consumers. Given the current importance given to consumer protection in the case law of the Court of Justice of the EU and the legislative activity of the European institutions, there is no doubt that the good of consumers is a value which should be of paramount importance for the EU legislator when drafting a new directive. For this reason, we invite you to take into account the comments presented above in order to make the provisions of the Consumer Credit Directive beneficial for the European economy – writes the ZPP commentary.
Consumer Credit Directive
In June 2021, the European Commission presented a draft new directive regulating consumer loans. The proposal aims to replace the existing 2008 consumer credit directive.
In the explanatory memorandum to the project, we read that the current legal act has not fully achieved its objectives and therefore needs to be revised. Its objective is to put in place regulations that are more readable than the existing legal framework for the operations of companies in the financial sector and to adapt the regulations to the ongoing digital transformation.
ZPP recognizes that the opportunities for the dynamic development of electronic payments, together with the following socio-economic conditions, are causing a change in existing consumer habits in favor of the use of tools that have not yet been legally regulated.
The Union of Entrepreneurs and Employers (ZPP) sees the need to revise the provisions of the Consumer Credit Directive. However, he believes that it should create a legal framework that will stimulate the development of the highly transformed fintech sector and not create undue barriers to European business innovation.
– In our analysis of the text of the proposal, we have identified several solutions in the draft which, in our opinion, can be detrimental to the development of FinTechs in Europe and can negatively affect the quality of the digital tools available and the satisfaction of their use by consumers. In the statement below we present our doubts regarding the proposed revision, we read
Currently, the fastest growing feature in e-commerce is the ability to purchase with a deferred payment date (“buy now, pay later”). This means that the consumer can buy online and pay later without paying extra or incurring very low fees.
– Access to safe financial services is beneficial for consumers and allows them to meet their basic needs. Low-interest (or interest-free) internet loans are, in principle, low-value financial instruments. Therefore, they are not the equivalent of large bank loans for the purchase of a house or a car. Therefore, BNPL has a low risk of increased consumer insolvency. BNPL operators offer many solutions aimed at adapting the product to the customer’s needs. However, the possibility of creating a suitable offer for customers can be limited due to disproportionate legal burdens for operators, which can lead to the creation of non-intuitive and incomprehensible instruments for consumers – explains ZPP.
The union believes that the requirements governing the assessment of solvency introduced in the draft directive should be adapted to the type of financial obligation entered into. The differing term and cost of the loan should determine the need for a proper credit risk assessment against the actual risk of insolvency. Socio-economic factors should influence the distinction between BNPL as a flexible payment option, the nature of high interest rate loans or the level of surcharges, or products with a higher amount of liability.
– Additionally, e-commerce companies have their own credible debt risk assessment systems based on online purchase history or a credit fraud database. Thanks to this, BNPL is a low-risk service, which should be reflected in the proposed directive. In addition, it is a service characterized by immediate implementation, so the traditional method of assessing solvency based on the verification of documents, for example income certificates, is unsuitable for the needs of the e-commerce and more expensive than valuation based on automated systems. Consumers may be reluctant or find it too burdensome to share their documents online. As a result, it would be a loss for FinTech companies and prevent some consumers from accessing credit tools – assesses ZPP.
Low value loans
The current law regulates credit obligations in the range of 200 to 75,000 euros. The proposed directive extends the provisions to all loans with a value equal to or less than EUR 100,000. This means that making small purchases with the use of the BNPL service will require the application of the provisions of the Directive.
– Many BNPL users do not consider this mode of financing as a loan. This is due to the flexibility of this tool, which can be adapted to the needs of a specific offer. It can take the form of deferred reimbursement for a fixed period (eg 30 or 60 days) or split into several installments suitable for the consumer. Another option is to buy on a trial basis, without the need for immediate payment, which is complementary to the increasingly popular free returns policy of online stores. The above influences the fact that it is difficult for a consumer to associate a classic consumer credit with the BNPL. Also legally it is not entirely clear how each type of BNPL should be qualified. Depending on the service provided, this may take the form of various legal contact obligations.
Obligation of information before the conclusion of the contract
Another factor likely to harm the development of innovative financial products could be the excessive obligation of pre-contractual information included in the draft directive.
– Currently, FinTech products are becoming increasingly popular precisely because of the simple and transparent rules for their purchase. This is a fundamental difference compared to traditional banking products, which are subject to binding information obligations as to the impact on the amount of liabilities. In the case of BNPL, the amounts of liabilities are so small and short-term that such detailed rules do not justify the need to read them in detail – explains ZPP.
– In addition, a large portion of users today make purchases through mobile devices. Therefore, BNPL is also most often used for purchases via mobile phones or tablets. The introduction of a broad obligation of information by the operators will make the proposed offer unreadable. This can lead to resignation from the service to the detriment of the consumer or his consent without reading the detailed terms of the contract – he adds.
This can lead to a dangerous situation called “consent fatigue”. It is a phenomenon that consists of presenting the user with a large amount of information that he must read and accept before using the product or service. A large amount of information presented causes a feeling of being overwhelmed by an excess of content from the consumer who wants to use the tool most effectively without the tedious reading of voluminous informative content. – Such a psychological effect entails a threat to the attention of the consumer who, by accepting the rules without reading them, may become a victim of fraud and accept unfavorable conditions. This is a negative phenomenon resulting from the disproportionate information obligation on the part of the operator. In view of the above, we are of the opinion that the increased information obligation will not have a beneficial effect for consumers, if an effective method of presenting and prioritizing information is not ensured – summarizes the ZPP.