In place of credit cards, cash-strapped consumers are turning to ‘buy now, pay later’ services for discretionary purchases. By running the risk of overspending, are they biting off more than they can chew?

For decades, instalment payments have helped many shoppers afford the latest gadgets or a shiny new car. But with the rise of e-commerce and digital wallets, a new payment method is helping the everyman get a slice of the good life — and millions are taking a bite.

From gym memberships to the week’s groceries, consumers around the world are turning to “buy now, pay later” (BNPL) services to make bills easier to stomach. Following the economic slowdown last year, cash-strapped consumers are drawn to the flexible payment plans, often offered with no additional interest charges.

See: How Rely is moving up the retail value chain

With BNPL services, a shopper without credit cards can purchase a $4,000 refrigerator, for example, and make good on the bill over the following weeks or months, paying as little as a quarter of the sum each time.

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Globally, the BNPL market is projected to expand from US$7.3 billion in 2019 to approximately US$33.6 billion ($44.6 billion) in 2027 at a CAGR of 21.2%, according to a report from Coherent Market Insights.

BNPL schemes are expected to account for 10% of all UK e-commerce sales by 2024, reveals Worldpay’s Global Payments Report 2021, which surveyed 46,000 consumers globally.

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The UK’s e-commerce market, already the third largest in the world, will be worth GBP264 billion ($485.4 billion) by 2024, a 37% increase from 2020.

Since platforms bear the risk of BNPL programmes, their risk assessments and credit scoring are done with AI and machine learning, turning them into valuable FinTech plays.

On April 20, leading Australian BNPL provider Afterpay announced plans to list in the US following its business update for 3QFY2021 ended March 31, with North America contributing half of the company’s underlying sales of A$5.2 billion ($5.38 billion), which in turn were up 104% compared to 3QFY2020.  

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Already listed on the Australian Securities Exchange since 2016, the Melbourne-based company is valued at close to A$35.90 billion ($36.98 billion) but has yet to turn in a profit.

Afterpay continued to make a loss in its third quarter, but this was not detailed in its business update. For its 1HFY2021 to Dec 31, 2020, impairment on receivables rose to A$72.1 million, up from A$47.8 million for the same period a year ago. Growth in impairment losses was slower than sales growth, which was at 89% y-o-y to A$417.2 million in 1HFY2021. 

At home, some 1.1 million Singaporeans have used a BNPL service, reported US survey company Finder in an October 2020 consumer survey.

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Inspired by the success of BNPL giants like Swedish pioneer Klarna and Afterpay, homegrown brands like Rely, Atome and Hoolah have launched their own versions of this service in Singapore.

The handful of BNPL brands here are racing to add participating merchants to their stable. Last December, Rely took the competition a step further by partnering an entire mall. Following a tie-up with Lendlease Global Commercial REIT, shoppers at [email protected], which is the REIT’s key asset, can now opt to use the BNPL service at all stores in the Orchard Road mall.

Southeast Asian tech giants have also been eyeing a slice of the BNPL pie. Ride-hailing giant Grab, poised for a Nasdaq listing this July, launched its postpaid and instalment payment service Pay Later in 2019, letting customers split GrabPay purchases into four monthly instalments.

Grab’s Pay Later also offers another payment option: to consolidate Grab rides, GrabFood, GrabExpress and online purchases into a single payment at the end of the month.

Southeast Asia’s most valuable startup will soon elbow its way deeper into the FinTech space. Last December, its joint venture with Singapore Telecommunications was awarded one of the two digital full bank licences in Singapore.

Around the same time, local gaming and hardware firm, Hong Kong-listed Razer, pushed further into the FinTech space with a partnership with Rely. Through the collaboration, Southeast Asian merchants registered under Razer’s B2B solution, Razer Merchant Services, can provide BNPL services to their customers at no interest.

That same month, card issuer Mastercard and Indian merchant platform company Pine Labs announced a new BNPL solution launching in Thailand and the Philippines in early 2021, followed shortly by Vietnam, Singapore and Indonesia.

According to Mastercard, 43% of consumers in the Asia Pacific region would be willing to increase spending by at least 15% if they were to pay in instalments. “With its fast-rising and digital middle class ... the Asia Pacific region presents major opportunities for merchants, FinTechs and lenders that offer shoppers the flexibility and convenience of spacing out payments on TV sets, appliances and other bigger ticket items.”

Eye on the wallet

The BNPL services interviewed by The Edge Singapore point to a large proportion of millennials among their user bases, owing to the generation’s ease with the use of technology. For younger millennials who get by without a stable income, many of them may also be shut out when applying for credit cards. In contrast, BNPL services welcome users without looking at their credit scores.

If today’s habits become tomorrow’s traditions, millennials may reshape the payments landscape in just a matter of years. According to MSCI, more than 60% of the global millennial population of 1.8 billion reside in Asia. By 2025, Generation Z, or those born between 1996 and 2012, will constitute the same share of Asia’s population as millennials at 25% each, noted a McKinsey report from March.

However, young consumers may lack fiscal discipline, a situation compounded by limited income in the case of students and fresh graduates.

In response to this growing BNPL phenomenon here, the Monetary Authority of Singapore (MAS) says it is mulling regulation for the growing sector over overspending concerns.

“While the concept of BNPL is not new, MAS and other government agencies noted that BNPL schemes have gained prominence over the past year, both in Singapore and other jurisdictions. The potential benefits and risks for Singapore consumers have become more relevant,” an MAS spokesperson tells The Edge Singapore.

“Should MAS and government agencies assess that a regulatory framework needs to be applied to BNPL providers, such a framework will be risk-proportionate and evenly applied across providers,” adds MAS.

MAS is not the only watchdog keeping its eyes peeled. After BNPL services exploded in popularity in the UK, companies like Klarna were placed under supervision by the Financial Conduct Authority (FCA) in February.

Under the FCA, which regulates financial services firms and markets in Britain, BNPL companies will have to conduct proper affordability checks before lending to consumers. Consumers will also be allowed to submit complaints to the regulator.

According to FCA’s former interim CEO Christopher Woolard, the BNPL market is worth GBP2.7 billion in the UK, with five million Britons turning to BNPL since the start of the pandemic. Worryingly, more than one in 10 UK customers of a major bank using BNPL services were late in repaying their debt.

Meanwhile, regulators Down Under have taken the lead in curbing enthusiasm over BNPL services. In a world’s first, the Australian Finance Industry Association (AFIA) introduced its Code of Practice for the BNPL sector on March 2.

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“All Code Compliant BNPL providers conduct suitability assessments before a potential customer can make a purchase and there will be additional checks to prevent customers from extending themselves further, for instance, if they are showing signs of difficulty in making repayments,” says AFIA CEO Diane Tate in a press release.

The new code of conduct follows five years of research done by the Australian Securities and Investments Commission (ASIC), which has published annual reports on the sector since FY2015/16.

Last November, the ASIC raised concerns over BNPL solutions, as one in five consumers in Australia were missing payments. Of those surveyed, 47% were aged between 18 and 29.

“Our review highlights that while ‘buy now, pay later’ arrangements have been embraced as a way to make purchases more affordable, some consumers are missing payments, paying missed payment fees and struggling to meet other financial commitments,” notes ASIC.

For FY2018/19, missed payment fee revenue for six of Australia’s BNPL providers — which include Australian torchbearer Afterpay — was over A$43 million, up 38% y-o-y, while the number of BNPL transactions nearly doubled from 1.9 million in June 2018 to 3.4 million in June 2019.

As at June 2019, the six BNPL providers in the report had approved 6.1 million user accounts in Australia. The number of active accounts grew 38%, from 2.7 million in FY2017/18 to 3.7 million in FY2018/19.

“If the ‘buy now, pay later’ provider’s data indicates that consumers are paying missed payment fees repeatedly, for example, or that these fees represent a significant proportion of the amount borrowed, the provider will need to consider why this is occurring,” writes ASIC.

From October 2021, new design and distribution obligations will apply to all products regulated by ASIC, including BNPL companies. Designed to weed out predatory selling tactics for financial products, they will require firms to design more targeted financial products to meet the needs of consumers.

Regulation or self-discipline?

While most BNPL services do not tack on an interest fee, late charges are in place to ensure prompt payment, along with a temporary suspension of new purchases. Are these safeguards enough to prevent overspending on the consumer’s part and overlending by BNPL platforms?

“I think any company that lends money, irrespective of the structure, should be subject to regulation. Otherwise the potential for a wide-scale default is very real,” says Stefanie Thio, joint managing partner at the Singapore-based TSMP Law Corp.

“FinTechs, if unregulated, will be tempted to build business by lending freely, especially as money is so cheap in today’s low interest rate environment. This may cause them to be more lax with their credit control process, which could result in a serious insolvency bubble,” warns Thio.

Consumers also have a responsibility to be prudent, says Thio, and should bear in mind the impact on their credit scores. “For customers, easy money today which, if they cannot repay, will mean a mark against their names when they try to borrow money later. In today’s interconnected world, your digital past sticks with you … With more FinTech platforms using our spending patterns for their evaluations, consumers may not know the far-reaching impact of their financial actions today.”

The perceived popularity of BNPL among the young has something to do with societal norms. Young Singaporeans joining the workforce may feel that they have to make particular purchases, says Associate Professor Ang Swee Hoon, deputy head of department at NUS Business School. This could make them more susceptible to debt traps.

“My observation is young Singaporeans are less likely to change how much they spend despite Covid-19. Especially since they are starting their careers, they need to spend on clothes, and so on. These items are less pertinent for older Singaporeans. As digital natives, the young shop more online,” notes Ang.

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“As Covid-19 may have also made it more competitive in view of fewer employment opportunities, millennial consumers may spend even more on grooming products to put their best foot forward. Hence, ‘buy now, pay later’ schemes may be attractive to them,” adds Ang.

Despite the popularity of BNPL services, Ang believes traditional banking products like credit cards and loans will not go away yet, although they may not be suitable for all millennials. “Traditional bank products may be preferred by more conservative consumers, who need some external measures for disciplined purchases. The penalty for non-payment is very high … From a business perspective, there may be rising bad debts when consumers cannot pay in full at the end of the instalment scheme,” she says.

Whether consumers turn to banks or BNPL services, “self-discipline is critical”, says Ang. “Otherwise, we may cultivate a generation of spenders with little savings. We will also be encouraging a consuming culture, which, in an era of environmental protection, may not be politically correct.”

MAS, on its part, reminds consumers to spend prudently and read the fine print before using a payment service for the first time, and not be carried away by mere convenience. “Consumers may be at risk of spending more than what they have budgeted for when they use BNPL schemes and instalment plans for their purchases,” says the regulator.

MAS adds: “When using such BNPL schemes or instalment plans, consumers should also bear in mind that these are still debts to be repaid, with potential late fees and charges imposed if consumers miss repayments … BNPL schemes and instalment plans should not be used as a way to buy items that are more expensive than what consumers need or can afford.”

Traditional lenders roll with changing spending patterns

The pandemic has spurred many to be prudent about their finances, changing the way they live, save and spend. This is according to Jacquelyn Tan, head of group personal financial services at United Overseas Bank (UOB).

In 2020, 58% of UOB’s new credit card sign-ups were for rebate cards, up from 37% in 2019. “One change we have observed is their focus on value purchases and essentials. Across age groups, consumers are now opting for cash-rebate credit cards over those that give other types of rewards,” says Tan.

Millennials aged 24 to 39 years old formed 58% of total new credit card sign-ups with UOB in 2020, with more customers opting for cash-rebate cards over miles or loyalty cards. “Cashback cards have grown in popularity among millennials as lifestyle priorities change or are curtailed due to the ongoing pandemic. As millennials keep to potentially tighter budgets during this period, cash rebates enable them to stretch the value of their purchases,” says Tan.

While physical retail fell between 70% and 90% y-o-y for most merchants from April to June 2020, Singaporeans turned to online alternatives with increased vigour, says Tan. According to UOB, food delivery expenditure surged 400% y-o-y in 2020, while online purchases of electronics and groceries rose 200% y-o-y and online furniture spending increased 150% y-o-y.

Apart from discretionary spending, mature workers and those with families were hit hard by the pandemic. According to the OCBC Financial Wellness Index 2020, job losses and lower salaries hit Singaporeans’ ability to pay their housing loans and credit card bills.

Among three age groups, millennials aged between 21 and 39 years old were least likely to be able to spend comfortably. Of the millennials, 15% said they often borrow money from friends or relatives and 38% said they pay only the minimum sum on their credit card bills.

The findings arose from an online survey of 2,000 working adults in Singapore aged between 21 and 65. The 24 measurement indicators include regular saving habits, managing unsecured debt, paying housing loans and medical expenses, passive income streams and more.

Overall, the index dipped to 61 this year from 63 in the inaugural index in 2019. According to OCBC, the weaker economy impacted passive income, and fewer Singaporeans were able to spend comfortably following the economic slowdown.

“As always, we encourage our customers to exercise prudence and spend responsibly,” says Huong Tran, deputy head of cards at DBS Bank.

She adds: “Our cardholders receive payment reminders where they are reminded to pay their bills promptly to avoid incurring late charges or additional interest fees.”