Instalment credit dates back to the 19th century when people purchased items and paid for them in small instalments over time. However, in 2014, the fintech industry re-invented and re-visioned this historical scheme as buy now, pay later, or BNPL.
One early entrant was Australian Fintech, Afterpay, which offered online shoppers an easy way to shop online using digital payment plans based on instalments.
BNPL is today’s version of instalment payments, encouraging users to, as the name aptly suggests, buy now and pay later, for the most part, interest-free. Over the past year, there has been a steady momentum in the growth and expansion of BNPL.
So, it is no wonder that customers, mainly Gen Z and Millennials, have become attracted to the scheme’s combination of immediate gratification and deferred payments.
As far as payment methods go, BNPL offers users some of the following benefits:
- Saving time – giving users access to immediate purchases
- Convenience – easy to shop and pay online
- Ease of use – approval of applications is faster and easier, usually done electronically
- Keeps credit score unaffected when payments are made on time
- For the most part, it is interest-free and can be cheaper than using credit cards
The COVID-19 pandemic has played a crucial role in fueling the adoption of BNPL. Movement restrictions led to the temporary shutdown of brick-and-mortar retail stores, triggering growth in e-commerce and a shift in consumer spending habits.
Globally, the BNPL industry accounts for 2.1 per cent or US$97 billion of global e-commerce transactions, and this is only set to increase. The sector is forecasted to see a 13.23 per cent annual growth rate, hitting about US$680 billion in transaction volume worldwide in 2025.
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BNPL trends in the APAC region
Despite being relatively new entrants to the APAC region, some companies are already staking their claim on BNPL. Companies such as Atome, Hoolah, Akulaku, and Pace lead the charge in various parts of Asia, creating massive impact.
Moreover, the BNPL scheme has gained popularity and become Gen Zs and Millennials’ preferred online payment option as it allows users to defer payments and access credit more readily.
APAC is a lucrative region for BNPL growth. The high internet connectivity, low access to credit cards, and a high unbanked population make it an excellent market for BNPL Fintech’s looking for new revenue streams.
A KPMG report found that BNPL, along with embedded banking and open banking, has helped to keep investor interest in payments, garnering US$628.4 million of investments in Singapore, up from US$60 million in 2020.
In addition, banks are jumping on the proverbial bandwagon by partnering with BNPL fintech companies and even, in some cases developing their BNPL offerings. In Singapore, about 38 per cent of the population has used BNPL services, owing to the appeal of zero-interest rates and equal instalments.
Key statistics in the sector
- With an expected CAGR of 21.3 per cent, Asia Pacific will experience the fastest growth in the BNPL scheme, with the China market-leading growth.
- An IDC study shows that digital payment will yield an increase of 162 per cent across Southeast Asia by 2025.
- Three per cent of Singapore’s e-commerce market is BNPL, which will reach 13 per cent by 2024.
- There was a 280 per cent increase in retail partnerships in Singapore between 2019 and 2020.
The risk of consumerism in BNPL
BNPL allows financial institutions to market their services unlimitedly and without merchants. While this sounds exciting and seems precise what people want, some regulators worry that the trend might cause a significant increase in consumerism.
During the pandemic, there was an increase in online activities, especially online shopping. As a result of spending more time at home, more people became glued to the internet and online goods and services available for easy consumption.
The temptation for impulse buying might be more difficult to resist by online scrollers, and this can signal the start of an unhealthy consumerist culture. Consumers might incur debt and use credit in situations they really should not.
Fourty-three per cent of Gen Zers have missed their BNPL payments at least once in the past year, raising concerns about consumer protection in financing options available to customers.
To address this, BNPL Fintech’s typically use AI-based credit scoring to immediately approve/deny a user’s application to use BNPL services. Fintech is increasingly trying to mitigate lousy lending through AI and online software, especially BNPL.
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Similar AI-based systems have already been used in the financial sector in issuing personal loans and credit reports.
How can BNPL encourage financial inclusion?
APAC still has a large unbanked population, with an estimated 290 million unbanked adults in the ASEAN bloc alone. This has limited the ability of individuals to earn, borrow, and SME business owners’ capability to expand and grow.
As many governmental and non-governmental agencies and private sectors, particularly in APAC, have prioritised financial inclusion, BNPL is emerging as a critical tool in helping tackle this issue. The Global Partnership for Financial Inclusion (GPFI) has invested in the financial inclusion scheme, recognising it as one of the main pillars of the Global Development Agenda.
By enabling purchases to be broken down into smaller, more manageable payments that can be made over an extended period, BNPL empowers people to procure products they might not usually be able to purchase. By its very nature, BNPL is an agile and swift payment solution that augments people’s spending power.
As more individuals face negative cash flows due to the COVID-19 pandemic, schemes such as BNPL can offer a lifeline, especially to migrant workers who have been attributed an unbanked status or face stricter qualification criteria for acquiring credit.
Thanks to BNPL’s soft credit cheques and non-traditional data, coupled with a convenient and straightforward application process, the underbanked can gain more access to credit which helps grow financial inclusion in a country.
The future
BNPL Fintech and banks have the potential to start a revolution in the finance industry, creating more decentralised systems for credit access for more people.
Credit card networks such as Visa and Mastercard are already increasing their play in this space by launching instalment products and entering healthy competition with BNPLs. With the increasing popularity and massive benefits, it’s clear that BNPL is here to stay.
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