Buy Now Pay Later – A Creditable Trend?

Buy Now Pay Later – A Creditable Trend?

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Paying off online purchases over time with zero interest is proving massively popular in Southeast Asia.

The online payments sector is expanding rapidly, and a major reason for that is rising consumer demand. Retail e-commerce sales worldwide are projected to almost double in three years, to hit over USD6.5tn in 2022. Meanwhile, movement and travel restrictions imposed by the Covid-19 pandemic have left consumers with more time on their hands and less opportunities to go out, with many turning to ecommerce for their dose of retail therapy.
As online shopping evolves, consumer habits change, too. Shoppers are demanding new payment solutions to make their purchases more affordable and easy to manage. One of the fastest growing online payment options is Buy Now Pay Later (BNPL). Globally, the market value of BNPL platforms is projected to rise at a CAGR of 21.2 per cent by 2027. In terms of regions, Asia Pacific is expected to be the fastest-growing BNPL adopter between 2020 to 2027.

Why is BNPL proving so popular?

Speed of approval at the checkout counter and ease of budget planning make BNPL extremely tempting to shoppers on a tight budget. The concept is based on good repayment behaviour in exchange for affordable purchases through flexible short-term payment plans without interest or fees. Consumers can access these services easily through mobile apps, and BNPL can be selected at the point-of-sale on a product page to split a payment into small, interest-free monthly instalments. Approval is more or less instant, so it’s perfect for a shopper looking to grab a limited-time deal on an item.
Financial hardships brought on by the COVID-19 pandemic also make such flexible schemes more attractive, especially popular among younger consumers, like Millennials and Gen Z. These younger consumers in particular are more likely to be early adopters of disruptive new payment methods – they’ve grown up with online transactions and trust this solution to work effectively, in other words.
Previously, consumer financing tended to involve arranging instalment loans from banks and traditional credit card providers. But just as we’ve seen consumers shift from physical brick-and-mortar shopping to online shopping, financing has evolved with the digital era. BNPL brings a lot of advantages for people in developing markets such as Southeast Asia. Here, growing ranks of younger consumers are either underbanked, have no bank account, credit or debit card, or access to lines of credit. According to consultancy Bain & Company, this amounts to more than 70 per cent of adults in the region, or roughly 450 million people.

So what are the cons?

For consumers who clear their debt before the zero-interest delay period ends, there are no concerns – you don’t pay a cent more above the original selling price of the purchase item. In simple terms, it’s a free loan. However, fail to make repayments in time and BNPL can prove an expensive scheme, with providers charging extra settlement fees and lump sum interest payments.
The ease of use and rapid approval process means that BNPL risk giving shoppers a false sense of affordability. Late payment penalties in the small print might not be read or understood in detail. If someone uses BNPL to make several big ticket purchases, such penalties could quickly stack up and bring trouble later.
Ultimately, missed payments could leave BNPL providers saddled with bad debt. The “light touch” credit risk assessment carried out by BNPL providers might not be sufficient to prevent this happening more often as the schemes grow in popularity, especially as they are more likely to draw in consumers with weaker credit history.

How do BNPL providers make money?

Instead of charging the consumer, BNPL providers make money from taking a cut from their merchants’ revenue sales, with merchants happy to pay if the scheme boosts their overall sales numbers. They also earn revenue from charging consumers late payment fees.
For fintech firms providing a BNPL service, competition is intensifying as the traditional banking sector is fighting to regain some of this market by offering their own flexible, zero-interest instalment schemes. Another challenge to providers is increased scrutiny from regulators in the region as governments seek to ensure consumers can continue to benefit from these BNPL products with the right protections. For example, the Monetary Authority of Singapore (MAS) in February confirmed that it is “reviewing the appropriate regulatory approach” for such schemes.
For BNPL providers, winning in the new landscape will mean navigating any new regulatory frameworks, improving customer credit assessment to reduce risk, while offering consumers the same flexible, easy-to-use service.
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