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Buy now, pay later gains strong momentum in Asia
Providers tap AI and big data to broaden client base, but is the financing model sustainable? What about the delinquency rates?
Daphne Li 3 May 2022

Buy Now, Pay Later (BNPL), a customer financing alternative that allows delayed payment with no interest charge, is gaining a foothold in the global retail consumer market and changing the payments landscape. But questions remain whether it is a sustainable business model amid the considerable marketing costs and relatively higher delinquency rates.

Pandemic-catalyzed digitalization has led to the rise of BNPL in e-commerce platforms, where merchants and customers have grown increasingly aware of the lending service offered at the point of sale.

The BNPL industry is forecast to grow 10 to15 times its current volume worldwide, reaching US$1 trillion in annual gross merchandise value (GMV), according to market research firm CB Insights.

The momentum is especially strong in Asia-Pacific, where BNPL adoption is expected to reach a compound annual growth rate (CAGR) of 33.3% during 2022-2028. Its GMV will increase to US$749 billion by 2028, from US$82 billion in 2021, market researcher PayNXT360 says in a report.

In Singapore, BNPL payments are expected to grow by 52.6% to reach US$773.9 million this year. Adoption of the payment method in the country will record a CAGR of 25.5% in 2022-2028, and GMV will reach US$3.02 billion by 2028 from US$507.2 million last year.

Popular among millennials and Gen Zers, the deferred payment option allows customers to settle payments at least a month after purchase, with no extra interest or fees imposed on punctual repayment. Merchants are usually charged with an average discount rate of 5%, in return for a boost in conversion rates and average order values brought by the service provider. Some BNPL providers also require a handling fee for each transaction.

A hard credit enquiry is normally not required to obtain the facility. Instead, credit assessment is done through data analysis backed by artificial intelligence and big data analytics. Alternative data such as phone metadata and utility bill payments are widely used to assess the customers’ creditworthiness. This is particularly useful in assessing underbanked or unbanked clients who often do not have a credit history.

Asia-Pacific trailblazers

In an increasingly competitive business, BNPL firms differentiate themselves through their target market, online-to-offline (O2O) commerce strategy and fintech ecosystem.

Tencent-backed Afterpay of Australia, for example, has transformed from focusing on discount retail business to servicing luxury customers, adding high-end brands such as Giorgio Armani, Yves Saint-Laurent and Jimmy Choo to its line-up. BNPL providers focusing on the underbanked and unbanked population, such as Southeast Asia-based Akulaku, usually recruit low-end merchants to cater to target customers.

Some providers also work with cross-border merchants and shopping malls to offer offline solutions to appeal to a wider client base, an equally important arena in a post-pandemic environment.

Not just mere retail financiers, most BNPL firms have also set their sights on integrating the service into the wider financial ecosystem such as virtual banking. “Players such as TMall or Ant Group offer shopping, payments, financing, and banking products on a single platform. These large providers already monetize consumer engagement through offerings other than financing,” according to a McKinsey & Company report.

A sustainable model?

The BNPL business model has raised some doubts as to its viability since many of its adopters still struggle to deliver positive returns after years of operation.

For firms based in the more developed markets in Asia-Pacific, the average delinquency rate is 1.5%, with some reaching as high as 15%. That’s above the average rate of credit card delinquency, which is 0.7% to 1.2%, according to a report from Quinlan & Associates.

Also, most BNPL providers fork out hefty sums on marketing to acquire and retain customers. Firms may see rapid user growth after giving first-time discounts and rewards during a member-get-member (MGM) campaign, but this may not translate into a meaningful retention rate due to a lack of engagement and brand loyalty.

“Over one-third of the users we have acquired are obtained through an MGM programme,” a BNPL provider in China tells The Asset.

As more market players seek a slice of the pie, profit margins are further driven down. Some BNPL firms have set their eyes on small and medium-sized banks to capitalize on their credit expertise and risk engines to build a suite of loan product offerings.

“Sustainability [in the business model] does not always come overnight. There has to be a concrete and practical plan,” says Soumyakant Dash, regional head of consumer lending at Southeast Asian superapp Grab. “The current global environment is an acid test for a lot of people.”

Asia-Pacific growth

The region, particularly China and Southeast Asia, has witnessed a rise in BNPL transaction volumes amid an emerging middle class, higher internet penetration rates and a growing prevalence of consumer finance products.

“Countries such as Australia, India, China, Singapore, Indonesia, and Malaysia recorded strong demand for BNPL payment options in this period. A large young population is primarily driving the demand and market growth,” according to the PayNXT360 report.

BNPL payment adoption in China is expected to grow steadily with a CAGR of 26.3% from 2022 to 2028. GMV in the country will rise to US$338 billion by 2028 from US$54 billion last year, the report says.

“The amount of loans we gave out is comparable to the GDP of a small European country,” a China-based BNPL provider tells The Asset.

Regulators in the region are aware of the rapid growth of the BNPL business. In April the Monetary Authority of Singapore announced that it was closely monitoring the BNPL sector, while believing that self-regulation should mitigate the risks in the business adequately. The Hong Kong Monetary Authority says it will continue to develop consumer protection measures for the new financing model.

Market consolidation

As the potential of the market continues to evolve, interested players are looking to acquire or merge with BNPL start-ups to access a larger market and customer base.

Pace, a Singapore-based BNPL provider, acquired competitor Rely in March. Founded in 2021, Pace raised US$40 million in its Series A funding round from investors such as UOB Venture Management and Vertex Ventures Southeast Asia.

Also in March, tech giant Apple acquired London-based fintech company Credit Kudos in an apparent move to speed up its foray into payments technology and BNPL products as part of its digital payment solution strategy.

“Industry consolidation will continue,” Grab’s Dash says, adding that the consolidation does not necessarily suggest that the business model will “get fixed” and there is much more to be done. 

“BNPL is just the start of a bigger ecosystem. We look at ways to bring value to users and merchants through the ecosystem so that we are able to create and monetize from them,” says Trasy Lou Walsh, regional general manager of BNPL provider Atome.

As the sector continues to consolidate, fiercer price wars and lower margins are to be expected. But amid an uncertain economic environment, the BNPL payment model is here to stay.

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