Fintech hot topic: A review of the EU consumer credit directive and impact on BNPL

Today, consumers can easily apply for credit online through innovative credit solutions like buy now pay later (BNPL).  

But consumers need to know what they are signing up for and how much they eventually have to repay. 

This is what’s sparked regulatory reviews.

To bring more clarity to consumer credit, the Council and European Parliament have recently reached a provisional agreement on consumer credit directive – effectively replacing the current 2008 directive on consumer credit agreements. 

For those BNPL providers who will be affected by the new rules, this will lead to increased on-boarding costs.

As an interesting side note, the recent FCA interim report focused on data sharing, which will level the playing field in regard to defaults and payments, leading to a more uniform data set to score. This will allow fintechs to provide more consistent offers to more consumers.

But what is the overall impact? Let’s get into it. 

The impact on BNPL firms 

While the new consumer credit rules will affect general credit providers, it will impact the BNPL space much more radically. 

BNPL providers may currently only be sharing data with the bureau that they use. Other bureaux do not see that data, which means that a BNPL provider could say yes to a customer unaware that five other providers may have also completed loans in the past week. Of course, this all has a huge knock-on effect on affordability… And a firm's ability to properly risk assess. 

At the same time, while steps have been taken by BNPL firms to tighten affordability checks in recent months, not all BNPL providers conduct a full risk check. 

Soft searches are also being used as a pre-check, by some credit providers, to screen customers and only make offers to applicants that are likely to pass a more thorough risk evaluation. Depending on the data and thresholds utilised, which is not necessarily uniform from each bureau and provider, this could be both unfair on the consumer or represent risk or lost opportunity for the credit provider.  

Yet with the directive coming into force, lenders must properly assess a consumer’s creditworthiness, and whether they can repay their credit. 

What does all this mean? BNPL and other fintechs need access to the right data to drive the best decisions.

But, before deciding on which Bureau to utilise for the additional searches required, consider these top tips.👇

BNPL firms: Consider these top tips before you buy bureau data 

If you are a BNPL provider or crowd-lending platform, the new rules to improve creditworthiness will mean you require a more robust approach. 

But before you part ways with your money, consider these key points:

• Given that the directive is coming into force, some bureaux will likely take advantage of BNPL businesses who will need to comply with the new regulations

• Don’t accept the pricing is the best they can offer - without getting a transparent view of the market 

So how do you gain a complete view of data pricing and what are the negotiation ‘must-haves’?

Data ‘must-haves’ for BNPL firms 

When negotiating data contracts, there are a few key considerations to take into account:

1.) Get a view of the entire market

The first step is to get an independent view of pricing offered to other lenders by your Bureau across the entire market. This allows you to compare pricing and understand where you sit in terms of the industry as a whole. 

This also allows for evidence-based negotiations for contracts and enables credit risk and procurement teams to make a better judgement on whether to switch or stay with the same provider.

2.) Review existing contracts 

At this point, it’s worth reviewing any existing data contracts you might have. Use the insight gained from step one, to understand the differences between what you’re currently paying and what others in the industry are paying for the same data.

3.) Complete a data benchmarking exercise

Benchmarking will highlight where you can make savings when purchasing data from the Bureaux. Plus, it will help to inform future negotiations too. 

4) Renegotiate terms

If you are not happy with the rates from your current credit data supplier, you don’t have to switch suppliers to gain cost savings. Instead, you can renegotiate terms and prices mid-contract and when it comes to renewal. In fact, we often find fintechs decide to remain with the same credit Bureau and will often renegotiate prices to gain substantial cost savings.

It doesn’t have to stop there, though. You can use data from multiple bureau sources to help with pricing leverage, diverse data sources, and even cover gaps in credit history.

Wrap-up

A true picture of affordability and creditworthiness is vital for providers and consumers. 

The European parliamentary changes will drive the change in the type of credit search required as a minimum and the FCA will forge improved content and accuracy of the data in the credit search. 

Key takeaway: While the EU Parliament and FCA will help drive change in this area, it’s up to credit providers to take proactive steps to meet the new rules. And that starts by having access to the right data, at the right price.