The rapid growth of online shopping as a result of the COVID-19 pandemic has led to an increased demand for different payment options for consumers at the checkout. One such option that is increasingly popular with consumers is the "buy now, pay later" ("BNPL") solution.
The hot trend in consumer credit
BNPL allows consumers to defer the payment of the product and repay the purchase price in several instalments over a certain period of time, usually at no interest. BNPL is also a palatable option for merchants, as it gives them another avenue to generate sales by providing consumers an accessible opportunity to acquire products on credit. Such manageable payment options are also likely to strengthen consumer loyalty and to attract a younger audience.
Consumers are usually able to access the BNPL solution through the merchant's platform – the BNPL service provider offers the BNPL model to consumers at the checkout on the merchant's website. Typically, consumers are asked to register with the BNPL service provider (if they are not an existing user), provide certain personal information and enter into a loan agreement with the provider. Another way of structuring the BNPL solution is through the direct offering of BNPL products by merchants.
That Bulgaria is no exception to the trend and growth in the popularity of BNPLs is evidenced by the emergence of new fintech BNPL providers on the market as well as commercial banks starting to offer similar products.
Current regulation in Bulgaria
Currently, Bulgarian law does not specifically regulate BNPL solutions. It is therefore possible for BNPL service providers to structure their BNPL solutions in such a way that they benefit from the exemptions under the Bulgarian Consumer Credit Act (the law that regulates the provision of consumer credit). This would allow them to enjoy relaxed requirements in relation to, among others: (i) disclosure of information, (ii) contents of the consumer credit agreements, and (iii) assessment of creditworthiness. For example, credit arrangements where (i) the credit is granted free of interest and other charges, or (ii) the credit is to be repaid within three months and only insignificant charges are payable, fall outside of the consumer credit regime. There are no specific requirements or limits on the total number of repayments or on the minimum and maximum value of the deferments.
If the BNPL product falls under the exemptions above, BNPL providers are not required to perform credit assessments on consumers prior to offering BNPL solutions in the manner envisaged by the Consumer Credit Act
Nevertheless, any lending activity performed in a business-like manner in Bulgaria requires a licence as a credit or financial institution. Therefore, companies that wish to establish BNPL operations in Bulgaria will have to comply with the requirements under Bulgarian law applicable to credit or financial institutions (as the case may be). These requirements include obligations related to anti-money laundering, such as conducting customer due diligence. However, certain requirements would not apply to those BNPL service providers operating in Bulgaria on a cross-border basis through the EU passporting regime.
BNPL service providers in Bulgaria are also required to disclose certain pre-contractual information to the consumer before the consumer is bound by a credit agreement, even if the BNPL product is exempt under the Consumer Credit Act. Such information includes, for example, a full description of the BNPL solution, information about all charges due by the consumer (if any), and means for communication between the parties.
Considerations for consumers
The relaxed regulation of BNPL solutions raises certain considerations for consumers. Despite the fact that BNPL solutions are usually in the form of interest-free credit products, they could expose consumers to risks similar to other standard forms of credit.
The "no interest" arrangement may be misleading to consumers and may lead to the understanding that there is no credit risk involved for the consumer.
Additionally, BNPL service providers rely on a smooth online process for the provision of credit without burdensome verification checks. This approach may prompt consumers to make a large number of lower-value purchases and accrue a significant amount of credit.
The risk for consumers is further accentuated by the lack of regulation regarding the treatment of consumers facing financial difficulties.
In view of the above, BNPL service providers may wish to invest more in assessing consumer risks and addressing contract cancellations and late payments when drafting their terms and conditions. Comprehensible and easy-to-understand terms and conditions can also help to mitigate the risks for consumer harm. Such an approach may help to ensure that the credit product offered is affordable for consumers.
The road ahead
The growing availability of BNPL solutions increases the importance of a careful balance between the interests of consumers and BNPL providers. BNPL solutions are likely to become the subject of stricter regulatory scrutiny: for example, the Financial Conduct Authority in the United Kingdom is calling for increased regulation of the BNPL model.
As of the date of this article, no specific legislative proposals have been published in relation to the regulation of BNPL solutions in Bulgaria. However, given the significant rise in online retail shopping and the use of such products in the consumer credit market in Bulgaria, it is likely that we will see a tightened regulated environment for BNPL solutions in the future that address the potential risks for consumers. Such regulation may have an impact on the structuring of BNPL solutions and the credit administration and collection process.
Even in a relaxed regulatory environment, BNPL providers must structure their models carefully to avoid any unnecessary costs or restrictions. It is essential to keep track of the constantly evolving regulatory environment to avoid legal risks and be able to address regulatory changes with an appropriate business model.
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