Buy Now Pay Later (BNPL)

Extension of the rules for consumer loans to all forms of BNPL

With the implementation of the new Consumer Credit Directive, almost all forms of BNPL, in particular invoice financing and zero-interest financing, will be considered as consumer loans. Only very short-term payment deferrals offered by merchants and service providers themselves are excluded from the consumer credit rules.

On the other hand, the exemptions previously applicable to many forms of BNPL for interest-free and fee-free, for short-term loans (up to 3 months) at low cost and for small loans (less than 200 euros) no longer apply. The Member States only retain the option of exempting such credit agreements from a very limited set of consumer protection rules on advertising, pre-contractual, and contractual information. Apart from that, these BNPL loans will also have to comply with the strict rules on consumer credit.

Strict new rules for BNPL

All BNPL providers will need to be prepared to comply with new, strict rules for their financing in future.

1. Advertising

The Consumer Credit Directive 2023 significantly restricts advertising for BNPL. It specifically forbids

• Advertising that encourages borrowing by suggesting that financing will enhance a consumer's financial situation.
• Advertising which implies that the decision to provide financing is independent of the consumer's other debts.
• False advertising that financing increases the consumer's financial power, substitutes for savings, or boosts their standard of living.
  In addition, all advertising must contain a clear and conspicuous warning: "Attention! Borrowing costs money"

2. Pre-contractual information

In future, BNPL providers will have to provide consumers with comprehensive information before concluding a contract.

Firstly, general information is required. The consumer must be provided with information on the key aspects of the financing offered, such as the intended use, the possible duration, the borrowing rates offered, etc.

Secondly, for all forms of BNPL, consumers will also have to receive pre-contractual information in the form of the European standard information, as is already the case for consumer loans.

3. Creditworthiness check

As BNPL financing will in future be consumer loans, an individual creditworthiness check of the individual consumer must be carried out before any financing commitment is made.

The requirements for creditworthiness checks will also be significantly tightened:

• In future, the creditworthiness check must be positive: Only if it is likely that the borrower will be able to fulfil his obligations may he be granted financing.
• The information on which the creditworthiness check is to be based is specified in detail. In particular, information on the consumer's income and expenditure is required.

4. Formal requirements

In future, all BNPL financing must be agreed in writing, unless the German legislator revises the current rules. This means that the consumer's signature ("ink on paper") or at least a qualified electronic signature will always be required for BNPLs.

In addition, comprehensive and detailed minimum contents are prescribed for the financing agreement, e.g. the specification of the effective annual interest rate and the default interest rate.

5. Right of withdrawal

In future, consumers will also have a two-week right of withdrawal for all BNPL financing. .BNPL providers must inform consumers of this withdrawal right at contract signing.

Conclusion

The implementation of the new Consumer Credit Directive into German law will introduce stricter rules for BNPL. Some of the new requirements result from fundamentally new consumer protection rules, e.g. on warnings in advertising or stricter requirements for creditworthiness checks.

Of much greater practical relevance to BNPLs, however, is that all BNPL financing will in future be treated as consumer loans and will have to meet the high requirements applicable to consumer loans. This is in particular true for BNPL financing, which was previously exempt from the consumer loan rules because it was a no-cost, small (less than EUR 200) or short-term (up to 3 months) financing.

BNPL providers, therefore, need to prepare for the implementation of these stricter rules from the end of 2026 at the latest, in particular with regard to advertising, pre-contractual information, creditworthiness checks, formal requirements and withdrawal rights.