The EU’s revised Consumer Credit Directive leaves European consumers with fewer choices and more financial struggles

You have seen the option if you have ever shopped online. Instead of paying in full for a product, you can have the item delivered immediately with a smaller up-front payment and cover the rest of the bill in several interest-free installments. The term for the practice is buy now, pay later (BNPL). Once just a reward for loyal consumers from mainstream stores, it has blossomed in the digital age. Over two hundred global providers, including European firms like the Swedish Klarna, Italian Scalapay, and the Polish Allegro Pay, offer such services across the Internet.

Where consumers notice an opportunity, however, European Union regulators only see a problem. Their worries echo earlier concerns about the growth of credit cards - individuals will give in to the short-term temptation of multiple interest-free offers and forget the long-term consequences to their finances of overspending. EU policymakers fear a hypothetical wave of private indebtedness and intend to apply the same policy solutions designed for bank credit to BNPL. On the 30^th of October 2023, European Parliament and Council members amended the Consumer Credit Directive, officially Directive 2008/48/EC, to classify interest-free offers like BNPL and credit under €200 as consumer loans. Member States must transpose the measures into national law by the 20th of November 2025, and the provisions will come into full force on the 20th of November 2026. 

More bureaucracy, more problems

Far from helping consumers do their shopping, the decision is vastly damaging. By adding red tape, the legislation limits competition and consumer choice. Paragraphs 1 through 5 of Article 10 compel lenders to provide complete pre-contractual information in line with the banking sector’s Standard European Consumer Credit Information. The required form lists a cavalcade of required data like extensive contact details of the creditor, the type and duration of the credit, drawdown conditions, and total credit costs. Besides such information generally being too complicated for a regular person to understand (see the failed US experience with equivalent regulations), the need to supply incredibly detailed information creates an artificial barrier for BNPL companies. Owing to their high operating costs, BNPL firms simply cannot afford to monitor every small transfer. Nor can they bear the risks to privacy of a data breach that comes with having to centralize more data. The true winners are the dominant retail stores, which are exempt from the requirements and can easily incur high fixed costs (owing to their much larger funds). For consumers, less competition translates to fewer and much less advantageous offers.

Creditworthiness and financial exclusion

Worse, the new rule excludes a large segment of consumers from access to any future credit. Article 18 of the Directive obliges BNPL third parties to check for creditworthiness before issuing even a minor offer. Ostensibly a safety precaution, the measure neglects that BNPL users tend to be much younger than the average banking population. According to a February 2024 Opinium poll of 3,000 young adults in France, the Netherlands, and Germany, 18% of Gen Z (those between the ages of 16 and 27) actively used BNPL, and an additional 17% strongly intended to do so. Younger consumers have a low credit score by default and would thus be deprived of the option by the Directive.

In reality, the regulation makes them likelier to end up in financial distress. Contrary to policymaker’s fears, consumers understand the need for savings and investment. A whopping 98% of German respondents to the Schufa Youth Finance Monitor 2023 survey stated that financial savings were a critical safety net, a figure identical to their parent’s generation. If anything, they were far less likely to rely on installments than their elders: where 53% of older adults want to finance large purchases with installments, only 35% of those aged 16-25 do.

Therefore, the actual individuals who use BNPL are much more self-aware and prudent than lawmakers assume them to be. The reason why they engage in the practice is to prevent depleting their savings accounts. Denying them access to BNPL via creditworthiness requirements makes it likely that they will have to dig into those funds when high inflation has hurt the value of their savings.

Conclusion - sensible proportionate policies moving forward

European policymakers should show the same common sense that consumers do. The spirit of proportionality invoked in the text (article 18, paragraph 3) must apply to broader decisions regarding BNPL itself. Given the damage to competition and consumers it could do, interest-free installments and small credit transfers are better off exempt from strict creditworthiness assessments and the Standard European Consumer Credit Information. Clearly, individuals organize their lives better when the fear of credit checks is not haunting them at every step. They also benefit far more from the information already available in the checkout flow related to the actual transaction in front of them. At the same time, the more limited use of data reduces the risks to consumers and supplier privacy while safeguarding the data minimization requirement (paragraph 156) of the 2016 General Data Protection Regulation. Proportionality further calls for an even playing field where BNPL and retail services are treated according to the same rules, regardless of whether the supplier is an intermediary or an independent entity. Lastly, and irrespective of these EU-level changes, member states should use the subsidiarity powers in the Directive (preamble paragraph 10) with proportionality in mind and impose no additional national burdens on consumers. Let consumers, not regulators, decide how best to shop online.