The current global environment is giving BNPL (“buy now pay later”) incredible momentum. People are working and shopping more and more from their homes. Many of them need more financial support than usual to complete their purchases. That is where BNPL comes in handy.
The basic model is simple: BNPL allows the customer to pay for purchases later, often interest free, without having to use traditional credit sources. There are clear advantages for the seller too, because BNPL option attracts new customers and increases the average order sizes of the existing ones.
In this article, we examine the opportunity and challenges for those interested to invest in, or rather invent, the BNPL market in Serbia.
E-commerce had been on the rise for years in Serbia and the pandemic has just accelerated the trend. Consumers, in particular digitally savvy Gen Z and millennials, choose often to shop online because it is more flexible. In responses, major merchants have opened their own online stores and the others may now choose one of several local Amazon-like online marketplaces to e-meet their customers. BNPL providers may further help the customers and merchants connect by increasing the former’s purchase power and adding a new functionality for the latter.
On supply side, due to regulatory and traditional reasons, local banks are the sole providers of credit. However, in the digital age, they had mixed success in meeting their clients’ demands for convenient and fast service. Legacy institutions are receiving near-daily criticism for poor handling of complaints, charging hidden penalties, and overall bureaucracy. There are also people who want but cannot use the traditional bank’s service e.g., because of their low credit ranking. Credit card penetration has been low and stagnating. BNPL providers may fill-in the market gap with improved technology, better customer experience, and tailored products.
The BNPL providers would have to comply with various regulatory requirements. These include:
Lending has always been a closed market in Serbia. Unlike many jurisdictions in which granting credit is licensable only if it tied with deposit taking, the Serbian laws for years allowed only banks to carry out either of the two, or both, as business activity. In 2014, the EU Payment Services Directive (PSD) had been transposed into local law allowing non-banks to provide payments services and, in that context – to grant credit. A local BNPL provider would need to obtain a license for a bank, an electronic money institution or a payment institution if it wants to originate its own loans. Or it would have to partner with or acquire one of those institutions. Payment institutions are least regulated entities and, in general, do not require massive resources to kick-start. Depending on the scope of services it intends to provide, a payment institution must generally have initial capital in the amount between EUR 20,000 and 125,000. But there is a (regulatory) catch. The National Bank of Serbia (“NBS“) has expanded the PSD requirement that “the own funds of the payment institution shall at all times and to the satisfaction of the supervisory authorities be appropriate in view of the overall amount of credit granted”. According to its implementing regulations, the NBS will be satisfied only if the payment institution has set at least EUR 1 of capital for each EUR 1 of loan granted.
The requirement seems excessive having in mind that the presumably low volume of loans granted by these institutions and the fact that they cannot accept deposits nor use moneys from their customers to fund the loans do not seem to pose significant systemic risk. But these are the rules for now.
The other limitations on credit granting by payment institutions are PSD-typical and BNPL-model compliant. According to them:
- the loan must be granted exclusively in connection with the payment transaction;
- the repayment term may not be longer than twelve months; and
- the loan cannot be granted from the funds received from the customers for the purpose of executing a payment transaction.
Foreign exchange regulations prevent BNPL providers from bypassing the local licensing requirements by offering the service to Serbian customers on a cross-border basis. The regulations allow individuals to take loans from foreign entities, but those transactions are reportable to the NBS, and the loan funds must be disbursed to the individual’s bank account (direct payments to foreign merchants would not be allowed). These features do not sit well with typical BNPL model.
Banks, and electronic money institution and payment institutions when granting credit, are subject to the laws on protecting users of financial services. Among other things, these rules require the creditor to provide comprehensive information to the customer before a contract is concluded. They entitle the customer to withdraw from the contract during a cooling-off period of 14 days (in the context of BNPL, this would essentially amount to loan prepayment without cost). The consumer protection rules also prohibit the creditor to use abusive marketing practices seeking to oblige the customer to buy a service they have not solicited and impose other restrictions and requirements.
The Serbian anti-money laundering and terrorism financing rules require payment institutions to take customer due diligence (“CDD“) measures (radnje i mere poznavanja i praćenja stranke) when onboarding new customers i.e., establishing a business relationship. The CDD measures generally include customer identification and verification, beneficial ownership identification and verification, understanding the nature and purpose of customer relationships, ongoing monitoring for reporting suspicious transactions and maintaining and updating customer information.
As a rule, the customer must be physically present for identification. Exceptionally, the verification of the customer’s certificate can be conducted by using: (a) video technology; or (b) the qualified electronic certificate, in both cases without the customer’s physical presence.
The NBS’s rules on customer identification via video technology are generally advanced, except that they require real-time conversation with a trained employee in all cases, which is costly if the payment institution is looking to onboard a large number of customers. Modern technologies allow reliable and efficient customer identification and verification, without necessarily involving human-to-human, live interaction. However, there are currently no indications that the NBS will further relax the rules.
The BNPL providers would have to comply with various other regulations including privacy, data protection, interest rate limits, etc. These generally do not differentiate much from the laws of EU and other jurisdictions in which BNPL model has strived. On that basis, we believe that the legal obstacles will not deter the prospective investors in the market.