The number of times I come across mentions of Buy Now Pay Later (BNPL) has dramatically increased and became ubiquitous in both brick and mortar businesses and the digital landscape in the last six months. The BNPL concept is based on good repayment behaviour in exchange for affordable purchases through flexible payment plans. The market value of BNPL platforms such as Klarna, Afterpay, and Sezzle is projected to rise globally at a CAGR of 21.2 per cent by 2027.

A little bit of context for Southeast Asia. Out of the over 670 million people in the region, only 27 per cent of the population have bank accounts. This sizable gap in banking penetration results in approximately 438 million unbanked individuals with no bank account, credit or debit card or access to lines of credit.

In parallel, there has been a shifting trend away from bank accounts and credit cards to services such as BNPL, especially in younger consumers, due to debt aversion and ease of use.

The concept of BNPL itself is not new yet it is becoming increasingly popular due to a combination of factors. These include changes in human behaviour caused by COVID-19-imposed restrictions; we have more spare time but are unable to go out shopping which we compensate by shopping online.

In principle, there are two main behavioural and psychological factors that drive BNPL: Loss aversion and present bias.

Also Read: Buy now, pay later: The changing face of finance for a mobile generation

Loss aversion

Research has found that spending money triggers areas of the brain associated with pain and disgust and that different forms of payment trigger different levels of discomfort. The pain of making a payment depends on the amount to be paid and on the method by which payment is made. Consumers who paid by credit cards rather than cash seem to experience less of a pain and hence were more willing to incur a given expense. As cash represents a physical representation of value, we feel more pain as people literally see themselves losing money.

Credit cards can be considered a prototype to BNPL as they use the same premise, albeit the only difference is paying the total price at a later date. Paying with credit cards provides a smooth transactional process, essentially decoupling the pain of losing their money in exchange for a product as there is no real money counting/giving process. An MIT study looking at purchasing tickets to a basketball game found that card-paying students were willing to pay twice as much as cash-paying students. Payment via credit cards is perceived as parting with a lower monetary value.

In both cases, the pain is linked to loss aversion, which is the tendency to prefer avoiding losses to acquiring equivalent gains. E-commerce companies are particularly adept at this, and constantly create urgency, offer deadlines for discounts and other ways of creating a psychological phenomenon of FOMO.

Also Read: ASX-listed Afterpay acquires EmpatKali to take its ‘buy-now, pay-later’ biz to SEA

In brief, we are built to avoid pain by all means, which, in our daily lives, is a recurrent phenomenon every time we pay via cash or credit cards. Perception of payment sometime later feels less painful.

Present bias

We humans are built to be focused/biased in present. We value US$100 more today then tomorrow, less the day after and even less in future. In other words, present bias represents that fact that people place a greater value on goods/income achieved in the present moment – rather than receiving the same goods/income in the future. It suggests given a choice between a payoff today and a payoff in the future, we will choose to have it now.

The timing of payments impacts the perceived value of a product. For example, people that pay for gym memberships monthly are more likely to exercise and renew their memberships compared to those that pay annually. These services provide a balance between pain and the perceived value/connection to the product. The focus shifts towards paying in future via smaller instalments, which are perceived as appealing and more affordable. As a result of tangible cash being abstracted away from us, it is harder to resist our impulse not to shop/consume via BNPL.

Also Read: 500 Startups invests in buy-now-pay-later services startup Split

The BNPL business model is heavily relying on payment in future in various industries. Flexible options from ‘buy now, stay later‘ hotelier packages supporting Asian tourism, to car manufacturers’ deferred payment plans for boosting car sales, all the way to ‘fly now, pay later‘ air travel are increasingly popular.

You may ask what is the result of these two phenomena combined? Studies show that tourists (and pretty much any anyone) with high loss aversion and high present bias are more likely to overspend.

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In the past years, we were always able to take a glimpse of the next year based on the events that happened on Q3 and Q4. For example, in 2019, we predicted that more startup founders are going to be involved in politics and governance (though it ended in an interesting plot twist) and that there will be greater scrutiny on later-stage companies.

This year, the pandemic dominates the conversation as it affects almost every single aspect of our life. In an unprecedented level, it has impacted various industries from travel and tourism to healthcare. Across the region, both startups and investors found themselves adapting to changes and seizing new opportunities.

But is the pandemic the only thing left to talk about? Is there anything in the startup ecosystem that is not directly affected by it –because life goes on anyway?

We believe so. This year, we are back with another prediction on the key events of 2020 –that are not directly related to the pandemic– that are set to shape the SEA startup ecosystem in 2021.

We identify four major trends that are worth noting about the ecosystem.

Also Read: Whoever wins the US election, the true winner will be the Southeast Asian tech startup ecosystem

The rise of SPAC as an alternative route to public listing

One of the highlights of 2020 was the IPO of Bridgetown Holdings. What set this moment apart from the rest is the fact that the Peter Thiel-backed company is a special purpose acquisition company (SPAC) –a company with no commercial operations that is formed strictly to raise capital through an IPO to acquire an existing company, according to Investopedia.

In an interview with e27, industry players predicted that SPAC will be a popular alternative for regional tech startups to get listed. The advantages of SPAC –as compared to the other alternatives– include its speed and liquidity for both investors and founders.

And they were right. Just this month, Indonesian unicorns Tokopedia and Traveloka had expressed their interests in getting listed through the SPAC route.

Our prediction is that, beyond these two companies, in 2021 we will see at least one more regional unicorns considering the route as part of their exit. Considering the popularity and reputation of both Traveloka and Tokopedia, and how they are often being touted as success stories from the Indonesian market, whatever moves that they are making will draw attention from the public. It will eventually lead to other companies seeing this as a good move –and copying it.

Digital banking is finally happening

One might argue that the pandemic has helped accelerate the adoption of fintech services such as e-payment. But the seed has been sown since the previous years when we noticed progress even in cash-heavy markets such as Indonesia; the pandemic has provided momentum for digital banking to secure its place.

Also Read: What makes Hong Kong the fastest growing startup ecosystem in Asia?

In 2019, Singapore announced the issuance of digital bank licenses which resulted with Grab, Sea, and Ant Group being announced as some of the companies to have secured the licenses. While these services will only start operating in early 2022, we can expect to see more actions from the sector in 2021.

The good news is that Singapore is not alone in this.

Earlier this month, Indonesian unicorn gojek announced an investment in Bank Jago as part of its foray into the fintech sector. Speculation about the unicorn’s foray into digital banking had circulated in 2019 when gojek investor Patrick Walujo bought a stake in Bank Jago.

In November, the Philippine central bank approved rules that will allow the creation and licensing of digital banks which central bank governor Benjamin Diokno dubbed as “additional partners” in promoting market efficiencies and financial inclusion, according to Reuters.

Digging into deep tech

Fintech and e-commerce will continue to dominate startup investment in the SEA region, but there will greater attention towards innovation that comes out of research and development in universities –deep tech.

By far, in SEA, Singapore seems to be the market that is more prepared than the rest to support a deep tech startup ecosystem. In addition to financial support, the government has also recently introduced the Tech.Pass as part of its effort to attract talent into the country.

Does that mean that Singapore will be the only SEA country to shine in this sector?

While the other countries might have plenty to catch up with, it does not mean that they are going to start from zero. In Indonesia, deep tech startups such as Nusantics had secured seed funding round this year, and the country has also seen the launch of its first deep tech accelerator as early as 2009.

Also Read: Why the TradeGecko acquisition by Intuit is a promise fulfilled by the SEA tech startup ecosystem

Computer, show me which startup to invest next

Fundraising remains an activity that is relying on the power of networking. However, in 2021, we will get to see more investors relying on the help of technology to seek potential investments.

One of the venture capital (VC) firms that have already implemented this approach is Rocketship VC. Despite being based in Silicon Valley, the firm was able to expand its portfolio to various regions around the world thanks to its heavy use of data.

Even if the pandemic does not happen, there is already a need for global investors to expand its reach beyond its own home market as the world becomes more connected. In addition to that, as China and the US become more mature as a startup ecosystem, investors will look for fresh opportunities in emerging market. The use of data and artificial intelligence will enable a more seamless process.

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E Green Global (EGG), a South Korean agricultural biotech company, has secured KRW 10 billion (US$9.2 million) in a funding round from YD-SK-KDB Social Value Fund.

EGG plans to use the capital to expand its production facility to supply seed potatoes to its US and Chinese clients, with whom it has signed a contract worth KRW 100 billion (US$92 million).

The new round of financing will also be used for research and development (R&D) in areas including technology related to biological resources, application of technologies, such as AI and smart farming in agriculture and integrated research on other food crops.

EGG is an agritech company established based on the plant factory platform to increase the productivity of various agricultural produce.

Also Read: Why agritech startups will call for the next e-commerce revolution

The startup aims to lead the global market for seed potatoes by breaking the inherent limits of its supply chain, which is crucial to enhancing its production.

Through its decade of R&D and market development, EGG claimed it has scored the world’s first-ever success in commercialising the Microtuber Technology (MCT), which increases the productivity and production sustainability of potatoes.

This has enabled it to secure long-term contracts to supply seed potatoes across China and the US while expanding its business to Europe and the Middle East.

Jointly established by SKS PE (a subsidiary of Korean conglomerate SK Group), Korea Development Bank and impact venture capital firm Yellowdog back in November 2019, the YD-SK-KDB Social Value Fund invests in social startups that contribute to the pursuit of the United Nations Sustainability Development Goals.

Also Read: Sustainability: the new business reality

“Nobody had been successful in commercialising the MCT for decades, yet EGG made it possible with its willpower and dedication to its mission of alleviating the world hunger,” a spokesperson from the fund said.

“We look forward to the positive social impact EGG will make, as it contributes to resolving the global food problem by increasing the quality and productivity of major food crops as well as contributing to developing crops that are resilient to the climate change,” he further added.

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