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One click to debt: 'buy now, pay later' is fintech's flavour of the year
BNPL action is really heating up in emerging markets; the route is now seeing increased scrutiny from regulators across South-east Asia
Dec 21, 2021
FORGET saving up to afford what your heart desires. A multitude of players now offer "buy now, pay later" (BNPL) options, from publicly-listed Grab to online travel agent Traveloka to specialised players Atome and Pace.
And with BNPL now entrenched in most online retail platforms allowing consumers to split their purchases into 3 interest-free instalments, BNPL has become the flavour of the year for anyone wanting to jump on the embedded finance bandwagon on their path to profitability.
Traditional banks have so far stayed away from offering their own BNPL products, but for incoming digital banks, a digital BNPL service could be a way to funnel customers into opening deposit accounts.
Investors too are backing the BNPL horses, with Atome's parent company Advance Intelligence Group raising US$400 million in September, along with a deal with Standard Chartered (StanChart) for US$500 million in financing. Similarly, Pace secured US$40 million in November to expand into Japan, Korea and Taiwan.
Grab's financial arm, Grab Financial Group, also raised US$300 million in January to further expand its financial services, including BNPL. With mobility and food delivery segments far from profitable, it has been leaning on financial services, including BNPL, to push up its bottom line.
While BNPL isn't a radically new financial product, with credit card instalment payment plans and hire purchase schemes having existed for a long time, BNPL packages options neatly into a digital service.
In the BNPL space, there is also a tale of two types of markets, the developed and the emerging, both with different propositions.
"If you take the Philippines or Indonesia as an example, the bankable population potential is huge but many don't have bank accounts or formal access to financial services. A solution like BNPL is tremendously useful," said Bharath Sattananthan, partner at consultancy Mckinsey & Company.
It is in these emerging markets that the embedded finance concept of being granular can come into play, allowing users to take single transaction loans of small amounts.
In developed markets like Singapore, where credit card and bank account penetration is high, BNPL's proposition is weaker.
And it shows in the statistics, with the 2020 BNPL transactions in Singapore accounting for S$114 million or less than 1 per cent of the S$92 billion in combined credit and debit card market transactions, according to the Monetary Authority of Singapore (MAS).
It is in emerging markets where the BNPL action is really heating up. For instance, Atome's revenue by geography for 2019 shows Indonesia contributing US$147.9 million and the Philippines, US$16.5 million, compared to US$51,006 from Singapore, according to latest financial filings pulled by Venture Cap Insights.
While BNPL makes purchases easier for consumers, "merchants stand to gain the most", said Mckinsey's Sattananthan.
BNPL gives merchants both a cheaper way to acquire customers, as well as a solution for solving cash flow issues, with payments coming in directly from BNPL players rather than having to wait for settlement from either banks or credit card companies.
Traditional banks so far have chosen to stick to income generated from their credit card transactions and products, rather than introduce their own BNPL product, although they do offer payment instalment plans at certain retailers and platforms.
Digital banks might not bite into BNPL either, judging by the 8 Hong Kong digital banks' offerings.
So far only two banks - Mox and livli - are offering BNPL services, but only through their debit or credit card offering, rather than a standalone product.
A BNPL service is a static credit line and effectively, an introduction to dealing with credit, while credit cards are rolling credit lines. Furthermore, credit cards are a high margin product that banks favour over BNPL, which could cannibalise the credit card pool.
"BNPL can be a good feeder product to get people used to buying stuff which they cannot afford today, and then they move to credit finance," said Varun Mittal, chief growth officer at insurance provider Aviva-Singlife Holdings.
BNPL is thus serving as an entry point into embedded finance, which could be a game-changer for any non-traditional financial services company, tapping into their user base and data to provide niche financial services to generate outsized profits.
But the BNPL route is now seeing increased scrutiny from regulators across South-east Asia, leaving it less of a grey area than it was in 2021.
Malaysia is looking to regulate BNPL players with a new act come 2022, while the Monetary Authority of Singapore (MAS) had said in February 2021 that it would look into regulating the industry.
As regulation rolls out, it would temper growth for the region, leading perhaps to more consolidation. After all, standalone BNPL players offer more than just a BNPL product; they have a customer and merchant base that could slot well into a larger platform or financial services player.
However, BNPL has a problem of being in the middle of the credit market, stuck between being a loan and a credit product. Players need to find a trifecta of cheap capital, wide distribution networks and scale in order to succeed.
That means players like Atome, with its US$500 million deal with StanChart, are now flush with capital and have a better chance of success.
Some companies in the United States and Australia have grown beyond being specialist standalone BNPL players.
Klarna is evolving into a digital bank, while Afterpay has been acquired by payment services provider Square.
And judging by how razor-thin Atome's profits were for 2019, at just US$260,418 with a revenue of US$166.7 million, it seems that standalone players will struggle to make the margins work.
"Affirm and Afterpay did very well because they had first-mover advantage, but longer term they need to be tied into a larger financial services firm like Paypal or become a larger financial services player themselves," said Zennon Kapron, managing director, Kapronasia.
Then there is the issue of defaults. Since BNPL is as yet unregulated with no requirements for players to report users to a credit bureau, default rates are still an opaque number that few are privy to.
But judging by Atome's provision for losses on trade receivables being US$48.6 million or 29.2 per cent of its revenue, the numbers may be sobering.
Coupled with how the pandemic has raised default rates in emerging markets like Indonesia, it seems that BNPL isn't such an easy business.
It's a cycle of needing more transaction data for a better credit-scoring model while also having to provide enough merchants for customers to transact and vice versa.
Moving into the future, it seems that there isn't much room for many standalone players. Like how there are only a few card issuance players globally now, there are likely to be a few standalone specialist BNPL players.
More consolidations are likely on the horizon, such as Hoolah being acquired by cash back platform ShopBack in November 2021.
"While there are fundamentally complete platforms with their own access to capital to transactions and own credit-scoring models, I don't expect there to be more than a couple of independent ones. Then there are also the BNPL services within platforms like Lazada and Shopee," said Dmitry Levit, founder of Cento Ventures.
