Cover Story: Buy now, pay later... or not?

This article first appeared in Wealth, The Edge Malaysia Weekly, on November 29, 2021 - December 05, 2021.
Cover Story: Buy now, pay later... or not?
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Tan (not his real name), a 40-year-old retailer in the creative industry, first heard about BNPL — or “buy now, pay later” — in April. His competitors were gaining new businesses by allowing customers to purchase items via this new solution of interest-free instalment plans. Not wanting to lose out, he quickly found out more about the scheme through friends and the internet.

Six months later, Tan began partnering two BNPL providers to offer their solutions to his customers. The spending limit, which is the minimum credit extended by the two providers, is RM3,000 and RM5,000. Instead of paying a lump sum for purchases, his customers can now split the payments into smaller instalments over the next three or six months.

For instance, if a customer buys a RM3,000 item at Tan’s shop with a three-month instalment plan under BNPL, he or she would need to pay RM1,000 upon completing the purchase, then fork out RM1,000 in each remaining month.

What if the customer does not make the subsequent payments? The two BNPL providers would bear the losses in exchange for charging Tan a fee of 6% to 7% for each item sold.

In an interview with Wealth, Tan says he welcomes the BNPL scheme for its timely arrival, as businesses are struggling to survive the pandemic. The scheme has helped businesses generate sales by easing consumers’ cash flow burden.

Even so, Tan believes that the spending limit extended by the two BNPL providers to his customers — almost on the spot — is “quite high”. The approval process can be completed with a debit card and is much faster than applying for an AEON credit card. Such convenience could encourage them to overspend, he says.

“Customers who visit our shop only need to download the BNPL app, link their debit card to the app and upload their IC (identity card) number to obtain the spending limit. It can be done in a few minutes.

“They need to submit other documents — including utility bills and bank statements — for a higher spending limit, which could go up to RM10,000, depending on the service provider. Different BNPL providers extend different amounts of spending limit to our customers. I opted for the two, as their limits are higher and apply across the board to all my customers,” he adds.

For comparison, consumers would take within 14 days to obtain an AEON credit card, having to submit more documents, including salary slips for three months. AEON credit cardholders can then purchase items of up to RM100,000 with a repayment tenure of 18 or 36 months. The maximum interest rate AEON charges is 1.25% per month (or 15% per year).

Tan is not too worried about customers’ inability to pay. “So far [as at Oct 24], all our customers’ applications have been approved. And we have received all our payments, in full, from our [BNPL] partners. We are looking forward to working with more BNPL players.”

Since he started offering the scheme, about 30 customers have enquired about it, with about one-third of them opting for the payment solution. “I expect the trend to continue to grow. You can even buy membership of a food chain with BNPL these days,” he says.

"Someone may not be able to buy a nice sofa set at RM5,000 by making a single payment. But now, he or she can with BNPL, with a three- or six-month instalment plan. You are not charged an interest to buy it, but you are paying more than what you would have paid [for a sofa in the first place] or what you can afford.” - Mahfuzur

Trapped in debt, unknowingly

While Tan is not particularly worried about consumers spending excessively, the scheme has caught the attention of various parties — in particular, the regulators, academicians and industry players.

On Oct 8, Bank Negara Malaysia announced that it is working with the relevant authorities to address growing concerns that BNPL may encourage consumers to spend on borrowed money they may not be able to repay, even though the industry does not fall under its purview at the moment.

In reminding the public not to take on “debt” that they cannot afford through BNPL, the central bank is indicating that it sees the scheme as a form of loan extended by BNPL providers to consumers.

Some quarters view BNPL as merely a payment method, since it does not charge consumers interest. But Dr Mahfuzur Rahman, senior lecturer at Universiti Malaya’s Faculty of Business and Economics, begs to differ.

“BNPL is a loan — only that the interest is charged on the merchants, not the consumers. BNPL allows its providers to extend credit [and earn profits]. It isn’t a free lunch,” he says.

By not charging consumers interest, Mahfuzur says BNPL could cause them to chalk up more debt unknowingly, as they can now buy various items that they otherwise would not have been able to afford.

“For instance, someone may not be able to buy a nice sofa set at RM5,000 by making a single payment. But now, he or she can with BNPL, with a three- or six-month instalment plan. You are not charged interest to buy it, but you are paying more than what you would have paid [for a sofa in the first place] or what you can afford.

“What if you buy various items, including a TV, fridge, air con and more with BNPL, and your source of income is affected one day? You could default on all your payments. The debt that BNPL could potentially incur upon consumers is hidden. Would it be a case of buy now, and not pay later?” he asks.

This is where the late fee comes into play to deter consumers from defaulting on their payments. A quick search online shows that consumers are imposed a penalty of up to RM150 per transaction, or 1.5% per month on the overdue amount if they do not make payments on time. It may not be a hefty sum, but the amount could quickly add up according to the number of items purchased.

"According to an Australian Securities and Investments Commission report that was published in November 2020, 20% of Australian consumers said they had cut back on, or sometimes passed their days without, essentials such as meals to make their BNPL payments on time. In addition, 15% of them revealed that they had to resort to taking an additional loan [to pay off their previous loans].” - Lee

In fact, the debate on whether BNPL service providers are profiting from late-payment fees, seemingly at the expense of consumers, has been ongoing in Australia, says Rian Philip, CEO of BNPL start-up MobyPay.

“If you look at the finances of some of the public listed BNPL companies, their late-payment fees amount to several millions a year. The amount is small compared with the profits they earn from merchants. Yet, it has raised concerns whether this has become a way for BNPL providers to make money.”

Grace Lee Hooi Yean, associate professor at Monash University and head of the Department of Economics, says various research has already found that BNPL contributes to higher consumer debt.

“According to an Australian Securities and Investments Commission report that was published in November 2020, 20% of Australian consumers said they had cut back on, or sometimes passed their days without, essentials such as meals to make their BNPL payments on time.

“In addition, 15% of them revealed that they had to resort to taking an additional loan [to pay off their previous loans]. Half of these adversely affected BNPL users are youth aged 18 to 29. The users who missed BNPL payments also missed household bills (44%), credit card payments (32%) and mortgage payments (22%),” says Lee.

A fast-growing industry 

Yet, the local BNPL industry is expected to be on an upward trajectory. 

Market research store Research and Markets and PayNXT360, a research firm specialising in the payments industry, tell Wealth that BNPL has grown significantly during the pandemic, with 600,000 local active users last year.

By 2028, there is expected to be four million BNPL users in Malaysia, representing a compound annual growth rate of 24.6% over eight years.

From 2021 to 2028, BNPL gross merchandise value in the country is forecast to reach US$2.187 billion (about RM9.07 billion) from US$271.8 million.

Both firms concur that BNPL’s growth will continue to be underpinned by the “huge underbanked and unbanked population”, with 55% of locals either without or with limited access to credit facilities offered by banks.

New players, both local and foreign, will continue to emerge. According to PayNXT360, Australia-based venture capital firm Fatfish Group (FFG) in May acquired a 55% stake in Pay Direct, a local payment gateway provider, to expand its BNPL presence in the Southeast Asian market.

Mak Wai Hoong, CEO of subscription-based e-commerce platform Subplace, is also looking to introduce BNPL to its customers. The platform sells a wide range of products online, including water purifiers, mattresses and groceries, by partnering with merchants.

Similar to BNPL, a subscription-based e-commerce platform allows consumers to buy products via an interest-free instalment plan. The key difference is that they can charge buyers a premium on top of the price of products sold through the provision of extra services, such as product warranties and maintenance services.

For instance, the subscription plan of a water purifier could be sold at RM4,500 at an actual product price of RM3,000. The subscriber would pay RM75 a month over five years to own the product and to obtain other value-added services.

Comparing it with BNPL, Mak says the subscription model is more beneficial to Subplace, as it can charge consumers a premium by providing other services. The platform can factor the credit risk, which is the risk of consumers defaulting on their payments, into the price of its subscription plans.

“However, there are consumers who only want to pay the market price of the products. We want to provide them with such an option too,” he adds.

Mak says he would not be surprised if more subscription-based platforms jump on the BNPL bandwagon, as both businesses share similar traits. He expects the BNPL industry to grow tremendously, judging by the size of the subscription-based market today.

Mak, who was once a revenue officer at the Cuckoo Malaysian branch, says Cuckoo has been serving over one million households with its subscription model since it was founded in 2014. Its total annual revenue has surpassed a billion ringgit. The market size of Coway, one of the pioneers in the subscription-based business, is more significant.

“We are talking about just one product, which is water purifiers here, without considering other products such as printers, cars and more. The market is big. It is why in South Korea, subscription-based businesses are regulated. They cannot charge consumers more than a certain percentage for late payments. There are no such regulations yet locally,” he points out.

"What is most important is a regulatory framework that is transparent and provides a level playing field [to industry players]. [The regulations imposed] have to be proportionate to the risks of BNPL while recognising the benefits and convenience that it could bring to consumers and the overall retail industry.” - Lou-Walsh

Poised for regulation? 

With easier access to credit provided by BNPL providers, academicians and industry players agree that the industry should be regulated.

Mahfuzur says the BNPL industry could have a much broader impact on the country’s economy if the number of people who buy things they cannot afford grows significantly. “The financial system as a whole is interlinked. Policymakers should look into this.”

Regulators should ensure BNPL providers conduct proper credit risk assessments on individuals, he says. There should also be a centralised system that will prevent individuals from taking out multiple loans at once.

Monash’s Lee says the industry remains largely unregulated globally, but the rise in consumer debt has prompted some countries to consider regulating it. “The UK government, for instance, has proposed regulating BNPL-related shopping services. Klarna, one of the world’s largest BNPL operators, has already tightened its credit checks.”

Closer to home, the Monetary Authority of Singapore is assessing whether a regulatory framework is necessary to guide the evolution of BNPL, says Trasy Lou-Walsh, general manager of Atome in Singapore and Malaysia. Atome is one of the largest BNPL providers locally.

“In other markets like Australia, there is a code of conduct and certification to be [recognised as] a responsible ecosystem player,” she adds.

Lou-Walsh and MobyPay’s Rian welcome regulations that would benefit various stakeholders in the BNPL ecosystem. “What is most important is a regulatory framework that is transparent and provides a level playing field [to industry players]. [The regulations imposed] have to be proportionate to the risks of BNPL while recognising the benefits and convenience that it could bring to consumers and the overall retail industry,” says Lou-Walsh.

Rian hopes the regulators will work closely with industry players to address regulatory gaps and potential risks. “I support the idea of regulators governing this. But they must have an open dialogue with us frequently to know where the gaps are.”

He adds that local BNPL players have been exploring self-regulation, such as publishing a code of conduct for the industry. But there has not been much progress on the matter.

What the market should try to avoid is excessive lending activities that, in the worst-case scenario, could lead to a financial meltdown, such as in the 2008/09 global financial crisis, says Mahfuzur.

Keah Eewen, a licensed financial planner at VKA Wealth Planners, says consumers should be prudent when using BNPL. They should look at the fees imposed if they miss payments.

Consumers are encouraged to buy items they need and not things they desire but cannot afford. “People should be aware of what they need and don’t. They could easily overspend with BNPL,” says Keah.

 

Late-payment charge comparison

It is a little tricky to determine which “buy now, pay later” (BNPL) provider charges consumers more, or less, than others, according to the information provided by financial comparison website iMoney.

If we focus on late-payment fees without considering the spending limit and payment period, however, Split appears to be the best platform for consumers among the seven available – it does not charge processing and late-payment fees.

The most expensive choice is Shopee, which charges its users a processing fee of 1.25% and a late-payment fee of 1.5% per month.

According to iMoney, Shopee users can pay the entire amount when purchasing an item at the end of the month, with no fees being charged, or pay instalments across two, three or six months. The second option is where the fees come into play, and this makes SPayLater quite an expensive option.

“For example, if you purchase a RM3,000 item and choose a tenure of six months, you may have to pay RM187.50 (RM3,000 X 1.25% X 5 months; assuming you pay the first month upfront) in processing fees alone.

“Worst still, if you can’t make your payments, you may have to pay an additional rate of 2.75% a month, including the late fee. This is equivalent to an annual interest rate of 38.48%.”

iMoney reminds consumers that BNPL providers may report their missed payments to credit reporting agencies or appoint a third-party debt collector to collect any unpaid amount.

 

New law on BNPL schemes

Bank Negara Malaysia is working to enact the Consumer Credit Act next year to regulate “buy now, pay later” (BNPL) schemes. The Ministry of Finance and Securities Commission Malaysia are also involved in formulating the law.

To date, the share of credit extended to households through BNPL schemes remains small, at about 0.05% of total household borrowing, according to the central bank.

“These schemes have been on the rise, not just in Malaysia, but in other countries too,” Bank Negara governor Tan Sri Nor Shamsiah Mohd Yunus said at a recent news conference. “And there are legitimate concerns that such schemes may encourage consumers to spend beyond their means, with expensive debt that they may not be able to repay. Most BNPL schemes in Malaysia are offered by non-banks.”