On the 2nd of December, the three European institutions (Commission, Council and Parliament) came to a political agreement on the European Consumer Credit Directive (CCD). As we are approaching the final stages of this process that started in 2021, we are confident that the new rules will ensure the needed proportionality to deliver better outcomes and necessary choice for European consumers.  

We have said this before: we wholeheartedly support the regulation of the BNPL sector. The new rules should be straightforward to understand, promote mobility and choice, be future-proof and crucially proportionate to the risks associated with products being regulated to deliver effective consumer protection.

A sustainable alternative
At Klarna, our message to people is simple: in most cases, if you can afford something, you should pay for it with the money you have. But there are of course times when the use of credit makes sense, and where purchasing with a debit card is not the best solution – for example when shopping online. 

European consumers are increasingly taking advantage of responsible credit products like interest-free Buy-now-pay-later (BNPL) services. BNPL is an inherently lower risk credit option for consumers when paying for purchases than alternatives, such as credit cards, because it is interest-free and importantly, it has structured repayments over a short period of time. This prevents unsustainable and costly debt building up. 

How Klarna works
At Klarna we have always operated within existing rules and regulations, complying with all requirements as a regulated European bank and provider of credit. Our products already operate to high standards including clear repayment plans, buyers’ protection and transparent information for consumers to make informed decisions - offering a true alternative to riskier and more expensive, traditional forms of credit. 

Our products are not built around keeping consumers in debt. That is why we assess consumers’ ability to repay every time they make a purchase, and we restrict our services when a payment is missed to avoid people accumulating debt. As a result 99% of our customers pay us back in time, and that is why we experience 30% lower fraud and credit losses than traditional credit cards. This lower risk nature of BNPL products should be the guiding principle in determining how BNPL is regulated to ensure regulation is proportionate. At the same time we are investing in new personal finance features, designed to help consumers save time and money, and worry less about their finances. 

Outcomes-based regulation is the way forward
The extent of the new rules will depend on the outcome of the ongoing negotiations on technical standards by the European Parliament and Council, which are expected to be concluded in the first quarter of 2023. In that context, European institutions now have the opportunity to ensure the CCD offers a proportionate regime based on outcomes rather than becoming a prescriptive set of rules hampering innovation and falsely protecting consumers. Two main areas we believe proportionality should apply are pre-contractual information and the creditworthiness assessment. 

1. Pre-contractual information

• We believe pre-contractual information requirements must be transparent and presented in a way that makes sense to consumers, and tailored to the way they shop: immediately and online. Which is why we pride ourselves on providing clear, concise and intuitive information that allows our customers to fully understand what they can expect when they make a purchase with us. 
• To overload consumers of short-term interest-free credit, especially for low value items of no more than €90 on average, with unhelpful information will only confuse and distract them, give them a false sense of security, and discourage them from engaging with more relevant information – ultimately leading to unintended consequences and encouraging the use of more risky and expensive credit. 
• Rather than requiring consumers to ‘attest’ to the fact they have read and understood the information presented to them through a discrete e-signature, which we believe would encourage a ‘tick-the-box’ exercise, we advocate for the text to allow providers to present the information in natural ways that will support better consumer outcomes.  

2. Creditworthiness and databases 

• We believe it's best to prevent over-indebtedness problems before they occur, which is why we assess affordability for every purchase. Creditworthiness assessments should prevent irresponsible lending practices and take into consideration all necessary and relevant factors that could influence a consumer’s ability to repay the credit.
• Unfortunately, across the EU, external databases are very fragmented and in many Member States don't exist at all. When they do exist, they are unfit for purpose and not abreast of new forms of credit resulting in a distorted overview of the domestic credit market.
• We are therefore calling for an acceleration in the development efforts of the credit bureaus and public debt registries to facilitate more timely and more complete credit information sharing across all credit products, with the credit scoring systems reformed for the short term nature of BNPL products. This reform should happen in parallel to wider adoption of new sources of data facilitated by innovations such as Open Banking and Open Finance.

Lastly, we welcome the fact that EU legislators seek to close potential regulatory loopholes regarding the scope as it preserves a level playing field with other credit providers. If big online firms selling goods and services, who don't have any experience with granting credit, would be exempted from key consumer protection provisions such as creditworthiness assessments, whilst established, experienced credit institutions like Klarna can’t, it would lead to lower levels of protections for European consumers, exactly the opposite of what the review of the CCD envisages.

In the next months, we will continue working closely with EU legislators to ensure the text maintains its proportionality and remains outcomes-based and future-proof, so that new rules will promote mobility and choice, ultimately benefiting European consumers the most.