Still reeling from the countless geopolitical challenges of the past several years, the global economy continues in its attempt to return to some semblance of normality. Many of the world’s lower-income individuals and households continue to struggle as the lingering effects of the COVID-19 pandemic and the war in Ukraine have exponentiated the cost-of-living crisis.
However, emerging from financial instability and uncertainty has been the rapid evolution of digital financial tools that are providing those on lower incomes with more spending opportunities. Chief among them is the Buy Now, Pay Later (BNPL) model that has made particularly significant strides in some of the world’s emerging markets.
A recent report from Coherent Market Insights predicts that the global market value of BNPL is expected to rise by 21.2 per cent by 2027, with countries in the Asia Pacific region experiencing the fastest share of the growth.
But what is BNPL and how does it work? In short, BNPL is a form of short-term financing that enables customers to make a purchase today and pay for it later, typically in monthly instalments.
In the midst of the continuing and unrelenting global cost of living crisis, BNPL is allowing customers, including those who are earning at the lower end of the pay scale, to pay in increments for a variety of necessities including health, education, travel, and a multitude of other services.
Geopolitical situation
According to a report from the World Bank, the East Asia and Pacific (EAP) region’s economic recovery has been hampered significantly by the global pandemic, the war in Ukraine, the structural slowdown in China, and the fiscal tightening in the United States.
The report has also warned that households in the region that fell back into poverty during the pandemic will see real incomes shrink further as living expenses continue to rise. Russia’s invasion of Ukraine in 2022 and the war that has ensued have put several countries beyond their capacity to navigate the cost of living crisis effectively and efficiently.
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Combined with the relentless developing pace of climate change and the lingering effects of the pandemic, the United Nations has labelled this period of time as being the highest cost of the living crisis of the twenty-first century, as food and fuel prices continue to rise, debt distress escalates, and financial circumstances for millions continue to tighten.
Despite the crisis being global in nature, higher prices are frequently having a greater impact in lower-income countries, for families and individuals in many of the world’s emerging economies, food and gasoline make up a higher portion of their budget, which have been amplified greatly by the effects of price hikes on necessary amenities and products.
Many of these nations’ governments are working with dwindling and restrictive budgets to try to support and sustain the poorest of their citizens. According to a study conducted by GeoPoll, 75 per cent of respondents have identified rising food, utility, transportation, clothing, and housing prices have reduced their family’s standard of living.
Fortunately, consumers today have greater access to financial products and services, including BNPL, which makes it easier to save and manage money.
Uptake in digital technologies
Spurred on by geopolitical events, the rise of digital transformation in the Asia-Pacific region has increased exponentially in recent years.
According to an e-Conomy SEA report, the area is forecast to be the fastest-growing region in the world when it comes to internet adoption, with 400 million consumers taking their first tentative steps online in 2020 alone. Influenced by this, the BNPL model has become one of the fastest-growing segments in consumer finance, particularly in some of the world’s emerging markets.
A study conducted by Research and Markets highlighted that the BNPL Gross Merchandise Value in Indonesia alone is expected to grow from US$2,777 million in 2021 to US$25,338 million in 2028. The emerging youth population in South and Southeast Asia has led to a boom in digital consumption, and with an ever-increasing mobile phone penetration in the region, consumers are both depending on and spending more and more on e-commerce and social media sites to purchase products and services.
According to McKinsey & Company, the proportion of digital payments in Asia will be at 65 per cent in 2024, compared to an average of 52 per cent globally, ensuring the Asia continent is the driving force behind global spending growth.
Ultimately, this is contributing to an emergence of a population who are more consumer savvy, and who are able to use payment services, including BNPL, to navigate the continuing and ensuing geopolitical tribulations.
Opportunities for lower-income households
The rise in digital consumption by many in the South and Southeast Asia region has allowed many of those earning lower incomes to manoeuvre through the unrelenting cost of living crisis more efficiently, with BNPL being an option many are turning to. This type of payment option is on the rise for several reasons; sellers are not required to conduct hard credit searches, and an individual’s credit score is unaffected by engaging in such a service, once
they have paid off what they owe. In comparison to obtaining a credit card, this credit is much easier to access. The payment plans offered to consumers allow them to pay back what they owe in instalments, appealing to many customers as it means that they can spread out or postpone the expense of products without incurring any damaging interest.
Increasingly, BNPL is becoming the preferred payment option for younger generations who are warier about the hidden and interest fees of traditional financial products like credit cards.
A significant reason for this uptake is that the revenue model of credit cards and BNPL is starkly different. Credit card companies primarily make their money through the collection of annual fees, late fees, and interest fees. In direct contrast to this, the BNPL model makes money from the fees collected from merchants who use and accept their payment solution and doesn’t charge any fees from users.
Through using the BNPL service, lower-income households are gaining access to products and services that they may not be able to afford otherwise. The flexibility the BNPL payment option grants provides lower-income households with financial adaptability by allowing them to spread the cost of a purchase over an extended period of time and allowing them to manage their budget and cash flow more effectively.
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In many emerging markets where credit card penetration is low, lower-income households have the choice to buy quality goods and services without borrowing money from family or friends or instant lending apps.
Owing to the limited access to traditional credit options many lower-income families encounter, these households were dependent on high-interest loans to make ends meet. This now no longer needs to be the case, with BNPL options providing individuals with a more flexible alternative to high-interest loans.
Benefits of BNPL for the wider economic community
BNPL solutions are stimulating economic growth, boosting retail sales, and decreasing debts in tandem with improving financial inclusion for consumers. While the benefits of the service for individuals living on a lower income are apparent, there is also a multitude of benefits for the businesses, both small and large, that choose to adopt a BNPL option at their checkouts.
The payment instalment service allows the customer to overcome any hesitation they may have about making a purchase, resulting in a higher sales volume for the e-commerce business. It also boosts customer loyalty and increases a shopper’s average cart total value.
While the tool is extremely advantageous for those supporting themselves and their families on lower incomes, there is also scope for consumers to purchase airline tickets and cars, all on interest-free instalments when using BNPL.
The BNPL industry is currently booming in the Asia region, with the top BNPL companies in the world having a presence in Singapore, Indonesia, Malaysia, Australia, India, and China. According to a report from The Australian Finance Industry Association, BNPL made a significant increase to GDP and jobs in Australia and contributed US$14.3 billion to the Australian GDP in the 2021 financial year.
The report also disclosed that the employees and suppliers of businesses offering BNPL also benefit, ultimately resulting in a favourable knock-on effect on the economy as a whole. Stemming from this knock-on, or multiplier effect, BNPL’s overall economic impact surpasses the amount of direct revenue explicitly attributable to BNPL.
Significantly, this ensures that while lower-income individuals can avail of BNPL services, the businesses that offer this staggered payment method are contributing to the broader strengthening of the economic community, minimising the impact of the cost of living crisis at a larger scale.
As economies continue to navigate an ever-uncertain world, BNPL payment options provide much-needed certainty and reassurance for many lower-income households, wherever they are located, that food and other essential goods can be purchased when necessary.
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