‘Buy now, pay later’ under the microscope: the digital future of consumer credit in Germany

Germany’s Federal Ministry of Justice presented on 23 June the draft for the implementation of the new EU Consumer Credit Directive (Directive (EU) 2023/2225), whose reforms will bring extensive changes for lenders, credit intermediaries and those with related business models. In this article, we provide an overview of the civil law changes (BGB-E and EGBGB-E) and discuss the changes to the Trade Regulation Act (GewO-E), which provides for changes for credit intermediaries.

Digital contracts: farewell to the written form?

Section 492 (1) BGB-E is intended to abolish the written form for general consumer loan agreements. In future, text form, for example by email or PDF, is to be sufficient. Text form is also to be sufficient in future for the provision of pre-contractual information for general consumer loans (article 247 section 2 (1) sentence 2 EGBGB-E). Only property consumer loans must continue to be concluded in writing. This should be a considerable simplification in practice.

At the same time, section 492 (1a) BGB-E clarifies that pre-set options such as ticked boxes are not sufficient for an effective conclusion of contract. The consumer must actively and unambiguously agree. This provides legal clarity for digital platforms. Lenders must ensure that they can prove that the contract has been duly concluded.

Extension of the scope of application: ‘gratuitous consumer loans’ and ‘financial accommodation’

Gratuitous loans and financial accommodation

The previously applicable special provisions for gratuitous loans and financial accommodation (sections 514, 515 BGB) are to be abolished. This means that gratuitous loans and financial accommodation will now also be subject to the general consumer loan rules. In e-commerce in particular (for example, interest-free instalment purchases in the form of “buy now, pay later”), a review and adaptation of contract templates and the creation or adaptation of pre-contractual information would be urgently required.

Small loans and short-term loans

The previous exceptions for loans with small amounts of less than €200 or those with a short term of less than three months (section 491 (2) No. 1, 3 BGB) will no longer exist. All consumer loans, regardless of the amount or term, will in future be deemed to be general consumer loan agreements. However, for certain loans, such as those with small amounts or short terms, there are simplifications with regard to the requirements for pre-contractual information (article 247 section 3 (1) EGBGB-E).

Although there are simplifications for such “small loans”, providers of microloans and short-term consumer loans must adapt their compliance structures as they are now subject to the consumer loan regime. This further tightens the requirements for loans that are often economically small.

Instalment purchase as financing accommodation

Particularly relevant in practice: The draft stipulates that an instalment purchase offered by the merchant with a payment deferral of more than 50 days will in future be considered a financing accommodation within the meaning of section 506 (1) No. 4 BGB-E. This means that cancellation rights, information obligations and creditworthiness requirements will also apply to supposedly simple deferred payments.

Extended information obligations: new SECCI form

In principle, the pre-contractual information obligations for general consumer loans are extended (section 247(3)(1) EGBGB-E). At the same time, the draft makes use of the possibility to provide for lower information obligations with regard to small loans and loans with short terms.

In practice, however, the question of how the individualised completion of the “European Standard Information for Consumer Credit” (SECCI) form can be ensured before the contract is concluded is likely to continue to arise. The content of the SECCI template has been revised and is to be used for all general consumer loans (article 247 § 2 para. 3 EGBGB-E).

Requirements for the creditworthiness assessment: proportionality principle

The requirements for the creditworthiness assessment for general consumer loan agreements are to be adapted to the stricter standard for property consumer loans. After assessing creditworthiness, it must therefore be “probable that the borrower will fulfil his obligations in connection with the loan agreement in accordance with the contract”(Section 505a (1) sentence 2 BGB-E). At the same time, however, a principle of proportionality is established (section 505b (2) BGB-E). This means that the depth of the review must be adapted to the type and scope of the loan.

The requirement for such an assessment would probably also apply to gratuitous loans or payment deferrals, provided that payment deferrals of more than 50 days (micro- and small and medium-sized enterprises) or 14 days (for larger traders) are granted. However, requiring an in-depth creditworthiness check for this type of payment does not appear to be practical. Information from social networks may explicitly not be used as sources (section 505b (3) sentence 1 BGB-E).

Right of cancellation adapted and limited in time

The draft bill puts an end to the “perpetual right of cancellation”: a consumer who is generally informed of the existence of a right of cancellation can only cancel within 12 months and 14 days (section 356b (2) BGB-E).

In addition, article 247 § 2 paragraph 4 EGBGB-E provides for an explicit reminder of the right of cancellation between the first and seventh day after conclusion of the contract if the borrower was provided with the pre-contractual information less than one day before submitting his binding contractual declaration. This subsequent information must be provided on a durable medium and is likely to result in additional effort in practice.

The adaptation of the right of cancellation is particularly relevant in light of the fact that the legal fiction – if having used the model cancellation policy for general consumer loan agreements from annex 7 EGBGB – is to be removed without replacement.

Protection against usury: explicit nullity provision

Section 492 (9) BGB-E is interesting: although this does not change the existing requirements of case law existing in connection with section 138 BGB with regard to the permissible level of interest rates, it now explicitly regulates nullity of the contract in the event of a conspicuous disparity between the contractual interest rate and the market interest rate. This is generally the case if the contractual effective annual interest rate exceeds the market interest rate by more than 100% or 12 percentage points. Any security agreements also become void in this case. This regulation codifies previous case law on the permissible level of interest rates.

Better protection against over-indebtedness

The draft bill provides for an explicit ban on the unsolicited provision of credit (section 492 (8) BGB-E). According to this, funds should not be made available for the purpose of agreeing a general consumer loan without the consumer having previously requested and expressly agreed to the provision of the loan. However, it is questionable as to when such an unsolicited provision exists. If this is already the case when a customer is offered a previously selected deferred payment or a consumer loan again when selecting a payment method as part of an existing customer relationship, this regulation is likely to have far-reaching consequences for the customer journey of many online retailers.

Section 497a BGB-E is intended to create an explicit protection regime to provide support in the event of over-indebtedness. The standard obliges lenders to take preventative measures against and to provide support in the event of over-indebtedness. This includes referring debtors to debt counselling services and taking appropriate precautionary measures, which may include debt restructuring measures. These obligations may also apply to merchants, provided that a deferral of payment granted by them is not privileged by section 506 (1) sentence 2 no. 4 BGB-E. The obligations under section 497a BGB can therefore also apply to traders if they grant a deferral of payment that exceeds 50 days (micro, small and medium-sized enterprises). For larger retailers, a shorter period of no more than 14 days applies. Furthermore, in the latter case, no third party may acquire the payment claim. 

In addition, section 492a BGB-E now contains a general prohibition on tying, which extends the protection of property consumer loan agreements to general consumer loans: the conclusion of the consumer loan agreement may not be tied to the conclusion of other contracts (for example, residual debt insurance). Such tying transactions are inadmissible and void, even if they appear to be favourable for the borrower. Exceptions should only apply if the linked product has been legally authorised or approved by the authorities (section 492b BGB-E).

Sanctions for breaches of the law

In future, certain breaches of the provisions of the German Civil Code on consumer loans can be considered a breach of collective consumer interests (article 246e EGBGB-E). This will make it possible for the first time to penalise such infringements with fines of up to €50,000. This could significantly increase the effectiveness of consumer loan law, as the weaknesses of civil law enforcement can be circumvented and a strong deterrent effect can be achieved through high fines.

Renewal of the loan-broker licence necessary

The licence for loan brokers is to be regulated in future in section 34k GewO-E. By way of derogation from section 34c (5) No. 2 GewO, large retailers are also considered loan brokers in future, for example those who merely provide access to third-party credit offers in the form of buy now, pay later and which do not fall under the SME exemption of section 34k (4) No. 3 GewO-E (fewer than 250 employees and no more than €50 million annual turnover or no more than €43 million annual balance sheet total). What is also new in this context is that the granting of such a licence requires proof of expertise. The exact requirements for this proof of expertise are not yet clear. However, this innovation is likely to pose problems for some market participants. This is because the regulation also covers existing licences. Even those who already hold a loan brokerage licence must submit this proof of expertise by 19 November 2026 at the latest. Otherwise, the existing licence will expire.

Another new feature is the loan broker register in accordance with section 11a GewO-E, in which all loan brokers are to be listed. In addition, the cooperation between BaFin (the Federal Financial Supervisory Authority) and the trade supervisory authority will be prescribed by law according to the draft. This should ensure greater transparency.

Assessment and outlook

The reform of consumer credit regulations is, in practice, far-reaching and relevant. The draft for the implementation of the new Consumer Credit Directive not only means more consumer protection but also, often, a considerable need for action for providers and all market participants. Anyone who grants or brokers consumer loans will very likely have to revise contract templates, processes and internal compliance structures and, if necessary, provide proof of expertise in loan brokerage.

It is particularly positive that the written form is to be abolished and that the right of cancellation will be limited in time.

However, gratuitous loans and financial accommodation will in future also be subject to general consumer loan law and, therefore, also to stricter requirements. In addition, protection against over-indebtedness is to be significantly strengthened. Extended information obligations, stricter requirements for creditworthiness checks and new sanction options require a comprehensive compliance update for market participants.