Buy now pay later sector at risk following Europe’s moves to protect consumers.

UBS buy now pay later analyst Tom Beadle has warned that a proposed update to European Union consumer credit rules could be a harbinger of more to come in the BNPL sector. 

Late last week, the European Commission proposed an update of its rules to protect consumers when they take out a loan in a world reshaped by digitalisation and the pandemic. 

The update demands that information related to credit must be presented clearly so that consumers understand what they are signing up for. Furthermore, it will tighten up the rules under which creditworthiness is assessed.  

In a client note, Beadle said the proposed directive covers numerous issues and highlighted those that may impact BNPL services such as Afterpay and Zip. 

Firstly, he said, the update flagged potentially detrimental products, because of the high costs they entail or high fees in case of missed payments. This includes buy now pay later schemes. 

Second, there are calls for the unsolicited sale of credit, or the unilateral increase of a consumers’ overdraft or credit card limit, to be prohibited. 

Thirdly, he noted that credit providers should make a thorough assessment of a consumer's creditworthiness based on the consumer’s income and expenses as well as other financial and economic circumstances. 

"This development {proposed directive}is consistent with our view that regulation of BNPL will increase,” said Beadle. 

“The proposed rules have been subjected to a proportionality test, however, the degree of regulation proposed at the early stage of the development of Afterpay’s and Zip’s businesses in the EU is higher than that imposed in the Australian, NZ, and US markets at an equivalent stage, which may impact growth.” 

Rules could discourage sign ups 

The analyst argued that more onerous credit checks may make it harder for consumers to sign up for new services.  

“The interpretation of unsolicited sale of credit to consumers is unclear, we see a risk that this may impact the ability of BNPL services to partner with merchants to actively grow their customer bases through promotions.  

“We also highlight that Afterpay unilaterally increases consumers’ credit limits over time based on repayment behaviour; while the directive currently appears to ban this for credit cards and overdrafts, there is a risk that BNPLs may also be prohibited from doing so. 

Didier Reynders, the EU commissioner for justice, said: “The Covid crisis has impacted consumers in multiple ways, and many have faced financial difficulties. The digitalisation that has been accelerated by the pandemic, leads to a surge of online shopping and is profoundly changing the financial sector.  

"We must safeguard consumers, particularly the vulnerable ones. With our revision of the existing EU rules on consumer credit and general product safety, that's exactly what we do!” 

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