Despite the ban on lending to under-eighteens, young people can still use deferred payment services such as Klarna and Riverty. Last year, this included 600,000 transactions that could be linked to a minor, with an average amount of €50.
This is demonstrated by research conducted by the Dutch Authority for the Financial Markets (AFM) on “buy now, pay later” transactions, which was published on Tuesday. The Financial Supervision Authority is very concerned about this. Director Laura van Geest explained: “This group has not yet begun its financial life and is immediately taking on significant risks.”
What’s wrong with the idea of ”buy now, pay later”?
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First: What is buy now, pay later?
Buy Now, Pay Later (BNPL) providers give consumers the option to defer or cut off payment for their purchases until after delivery of the purchased product. Only when the consumer decides to keep the order – or part of it – does he or she have to pay the bill.
Afterpay is not new in principle, but has taken off in recent years due to the growth of online shopping and fintech companies such as Klarna (founded 2007) and Riverty (first Afterpay, 2018), which have responded. This method gives consumers the opportunity to view products first before paying. There is also no hassle regarding refunds when returning items. Another important reason to choose the method is that paying afterwards temporarily provides additional financial scope: those who only get paid later in the month can actually make a purchase now.
A free payment method – if you pay on time – usually appears in the same payment screen, such as iDeal (which instantly deducts an amount from your checking account) or credit card payment (also a form of deferred payment, but for this you must set a pay offset Constant). This method is on the rise; According to market researcher GlobalData, the number of transactions in the Netherlands will increase by 30 percent in 2022.
If the consumer chooses deferred payment, the online store will be paid immediately for the order by the BNPL provider. The BNPL provider must then ensure that the consumer pays their bill. The online store pays a payment risk of up to 4 percent of the purchase amount. The promise made by retailers is that this method will lead to increased sales. Many customers withdraw during the checkout process, for example because they do not have enough credit. With BNPL there is no problem.
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What’s the danger in that?
The consumer who opted for deferred payment, but does not pay in the end, will be presented with an invoice, on average 15 euros plus the original amount in case the payment period is skipped. If payment has not yet been made, the debt is transferred to a collection agency, which costs on average another 40 euros. “This makes it an expensive form of credit,” the AFM wrote.
Additionally, consumers can use BNPL as a way to gain additional financial space – even if that consumer already has debt. If you miss the repayment period, financial problems will only increase.
The AFM argues that using BNPL increases “debt habituation”: the ethics shift from first saving and then buying something to buying with borrowed money. For example, there has also been an increase in the use of BNPL in physical stores, where it was mainly used as an online payment method.
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Can’t the AFM intervene then?
The AFM currently has no resources to address issues related to postpaid services: Due to a loophole in the law, the European Consumer Credit Directive (CCD) does not cover buy now, pay later. This exception applies to (almost) free credit services where you only have to repay after three months. With payment terms of fourteen or thirty days, BNPL providers fall within this range.
As a result, BNPL providers do not have to adhere to certain information requirements, such as clearly displaying costs in the event of payment default. Providers also do not have to conduct a comprehensive examination of a customer’s income and expenses, as a credit card company must do, for example.
However, there are new European rules coming that will close the loophole in the law. This will take some time: the AFM will not be allowed to begin formal supervision until the end of 2026.
Last fall, four major providers in the Netherlands, Billink, In3, Klarna and Riverty, agreed on a code of conduct among themselves. It has been agreed, among other things, that service providers may not allow debts to accumulate: if a customer is already late with a payment, the same service provider may not allow a new BNPL payment. The companies also promised not to provide services to young people under the age of eighteen.
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How can young people still be able to pay with BNPL?
This is probably because young people under the age of eighteen circumvent the age verification processes of BNPL providers. The AFM points out that providers currently do not verify the age of users on every transaction. They only do this if the transaction is considered risky, for example because there is a large amount involved.
The Code of Conduct states that a transaction can in principle be canceled if the customer is found to be under eighteen years of age. However, the AFM believes that a pullback beyond that is not enough. “Every transaction is too much.” Because this violation appears to be occurring on a large scale, the watchdog calls for the immediate implementation of mandatory identity and age verification.
The four main providers are bound by a code of conduct Let us know in a comment The effects of the Code of Conduct are not yet clear in numbers. “We recognize that birth date fraud is a problem and are therefore entering into discussions with regulators and market players.”
In any case, the regulator has already made its voice heard: Finance Minister Steven Van Weyenberg has done so In response to the AFM results He announced that he would investigate, with other relevant ministers, whether age verification could be imposed. “Young people are financially vulnerable and this requires protection and awareness. Minors are not allowed to use this service.”
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