If you have walked past Utown’s Food Clique in the last few months of 2022, you might have noticed a standing banner advertising Grab’s latest initiative, PayLater. Alternatively, if you were to travel south to Plaza Singapura, you may have also noticed a sky banner of Atome’s, which includes the phrase “buy now pay later”.
What is Buy Now Pay Later?
“Buy now, Pay Later” (BNPL) is not a phrase invented by Atome. Instead, it is a form of short-term borrowing which allows consumers to make purchases via instalments. By allowing consumers to spread payments over time, the financial burden behind each purchase can appear lighter. Not only that, BNPL platforms would assure you that these transactions are interest-free, and take less than 2 minutes to set up.
While banks may decide to offer their own BNPL services, the platforms that are aggressively marketing themselves are not subsidiaries of a local or regional bank. They are companies, whose revenue is mostly sourced from transaction fees which liaised merchants bear.
And that, is how BNPL transactions retain their appeal of being interest-free.
Spelling Out the Hype
There are expectations of BNPL consolidating as a formidable fintech sector within the next decade. In Singapore, local BNPL payments are expected to grow by 37.3% on an annual basis. Look over the Causeway, and that number rises to 78.7%.
Why are BNPL payments becoming more popular? One very plausible reason for its accelerated growth has been the increased adoption of e-commerce during the global COVID epidemic. Global e-commerce sales have risen by 22% in 2019, which as we all remember, was only the start of the epidemic. In the post-covid era, as consumers continue to rely on digital transactions, more are becoming aware of the different payment options available, which of course, include BNPL transactions.
As Singapore steadily goes cashless, government agencies are also facilitating the wider transition to digital payments. The Singapore Quick Response Code (SGQR) is the world’s first unified payment QR code, and is the product of a combined effort between the Monetary Authority of Singapore (MAS) and the Infocomm Media Development Authority (IMDA). You might have seen it before. As these initiatives aid the phasing out of cash payments, consumers can be less resistant towards adopting cashless transactions, including BNPL methods.
Infographic explaining SGQR, the world’s first unified payment QR code, released by MAS.
From an e-commerce merchant’s perspective, incorporating BNPL could also boost sales. The change manifests in two ways:
- Conversion rate: the proportion of visitors buying something among the total number of visitors
- Average ticket sales: the average amount of sales per customer
With the possibility of earning higher revenue, merchants are incentivised to incorporate BNPL as part of their payment system. As such, the presence of BNPL only increases.
Press X to Doubt
Of course, there are reasons to doubt the hype. In contrast to the exciting double-digit expected growth of BNPL transactions in Singapore, local BNPL transactions composed less than 1% of Singapore’s total credit card and debit card payments in 2021.
If BNPL thrived on the unique social dynamics present in the COVID epidemic, the payment method now struggles with the tough economic conditions in its aftermath. With fears of high inflation and the advent of rising interest rates, the growth of major BNPL companies has slowed. Not only has the stock of US-based Affirm Holdings Inc fallen by about 58% between June and December 2022, but Swedish firm Klarna has also reported that their pre-tax loss in 2022 has tripled that of 2021.
Furthermore, while BNPL may seem accommodating, it can also appear like a debt trap. Compared to non-users, BNPL consumers are more likely to spend more than what is in their bank account, otherwise known as an overdraft. The number of late payments is also growing. These statistics point to a temptation to spend beyond one’s means, and also difficulty in keeping track of one’s bills, which have been split into three or four separate bills.
Regulation
As consumers continue to use a relatively recent payment method, regulation has become an increasingly popular topic of discussion amongst government bodies. Some have even issued formal guidance surrounding the use of BNPL.
Singapore: As part of a code of conduct announced in October 2022, customers are by default, restricted to a maximum of $2’000 in outstanding payments with a BNPL provider. Other recommendations include suspending a consumer from making more BNPL purchases once a payment is missed.
It should be noted that the MAS is not hostile towards the adoption and development of BNPL. We know that BNPL remains welcomed, because there have been examples of visible friction between MAS and fintech innovations like Binance.
As with most other fintech products, the government agency acknowledges BNPL’s potential to have a competitive edge over traditional financial products. It has publicly stated that regulation will run in parallel to fintech’s development, and has no intention of stifling innovation.
The code of conduct is not the last state response to BNPL. By late 2023, BNPL players would be able to communicate with a new credit information-sharing bureau. The bureau would allow them to learn more about each consumer’s ability to pay for their instalments, helping them distinguish between consumers who can honour their instalments and those who can’t.
Australia: The Treasury is looking into the potential inclusion of BNPL providers under the National Consumer Credit Protection Act, which would subject BNPL customers to background checks. Doing so challenges BNPL’s competitive edge of being hassle-free.
United States: The Consumer Financial Protection Bureau (CFPB) released a public statement, stating the intention of issuing guidance which would align sector standards with those of credit card companies. Such guidance would likely include background checks. The CFPB also seeks to increase the transparency of BNPL companies.
Read Now, Download Later?
Even though BNPL is not looking pretty in the short term, there are strong expectations that it will become a strong fintech sector in the long run. I will probably still see Grab’s PayLater ad every time I walk to Utown to get myself kopi c bing siew dai, and Atome will probably move from big banners in shopping malls to youtube ads.
Despite that, I know that I still won’t be using it.