BNPL Schemes

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Will BNPL schemes eventually lead to buy now, suffer later?

Buy now pay later (BNPL) schemes of spreading payments across short-term installments has revolutionized the financial industry in recent times, especially when it comes to consumer buying power. What initially started as a payment option to enable customers to be able to make the most of their spending power soon became a go-to model for most businesses today.

BNPL works by converting a payment into short-term installments. Most of these payments are normally of a small amount and customers have not been imposed any interest fees for their transactions. The only penalty for consumers is when a payment is delayed.

A Reuters report stated that the model proved popular among young consumers during the COVID-19 pandemic as e-commerce volumes soared, with BNPL transactions accounting for US$2 in every US$100 spent in e-commerce last year, according to GlobalData.

According to statistics, there are more than 100 BNPL firms globally. Klarna, Afterpay, and Affirm have been revealed as the world’s largest BNPL companies, boasting millions of users. In Southeast Asia, Atome has grown to become a household name among both customers and merchants when it comes to BNPL. Apple also recently announced that they are entering the BNPL market through Apple Pay.

Statistics have also shown that most customers have been keeping to their payments, with only a very small fraction missing payment deadlines. BNPL has been so successful in some countries that even banks are now starting to leverage similar methods when offering their products and services to customers.

However, despite the initial success of BNPL, there have been growing concerns about the long-term effects of this method. For one, regulators have started voicing concerns towards BNPL providers on how much leeway they can offer to consumers, especially when it comes to purchasing using this method.

Currently, anyone can use BNPL and is not subjected to any financial background checks compared to methods applied by banks and other financial institutions. While this enables more customers to use the platform, the concern regulators have is how the spending is controlled.

Are consumers actually buying products they really need or are they just getting them because BNPL enables them to? Simply put, can consumers actually afford to pay BNPL in the long run?

Should BNPL schemes be controlled?

In some countries in Southeast Asia, consumers are using BNPL to purchase groceries, coffee, food, and other basic needs. For BNPL providers, this enables customers to manage their finances and be able to afford such products, especially with inflation and increasing cost of living affecting those that do not have a high income.

However, the greater concern by some consumer advocates is the debt that consumers are building up over time by getting into BNPL. A report by CNN stated that the Consumer Financial Protection Bureau has already opened an inquiry into BNPL and has expressed concerns about unclear terms, potential data harvesting, and lack of other protections.

In Singapore, the Monetary Authority of Singapore (MAS) has assessed that effective industry self-regulation, through an industry code, should adequately mitigate the risks in the BNPL sector. Under MAS’ guidance, the Singapore FinTech Association has launched a BNPL Working Group to develop a code of conduct for all BNPL providers. The code, which is expected to be launched in the second half of 2022, will seek to mitigate the risk of consumer over-indebtedness and establish minimum safeguards to ensure that consumer interests are well-protected when using BNPL schemes.

Over in Malaysia, the central bank is working together with the Ministry of Finance and Securities Commission Malaysia to enact the Consumer Credit Act this year to strengthen regulatory arrangements for all consumer credit activities including BNPL schemes offered by non-bank operators.

The Australian government will also push ahead with plans to bring BNPL under credit laws. Currently, Australian BNPL providers are exempt from laws designed to protect borrowers who use products such as credit cards or personal loans. Interestingly, the BNPL industry in Australia is currently experiencing challenging times with some players struggling to keep up with the demands of the industry as a whole.

The reality is though, as much as BNPL may seem tempting to consumers, it will only lead to increased debt if there is no control. Just as banks regulate loan amounts and credit card limits, BNPL should also have some form of regulation to ensure consumers are protected and do not fall into the debt trap.

There is no denying that BNPL schemes have enabled a lot more people to have the ability to shop and buy products they want. However, without any form of control, consumers are only going to end up buying now and suffering a lot more later.