Radek Jezbera

Buy now, pay later (BNPL) platforms have been gradually carving out a niche in the consumer market, offering an alternative to credit cards and loans for those who don’t have ready cash to purchase items.

The BNPL mechanism is nothing new, but the service has been augmented by financial technology and supported by the exponential rise in e-commerce.

While the growth of BNPL in Asia is not accelerating at breakneck speed, the flexible form of short-term financing is threatening to disrupt traditional payment services.

BNPL allows a consumer to pay off a purchase in installments, rather than all at once. The industry standard is to pay in three to four installments, but options differ by provider. There is typically no interest charge if the buyer pays off the entire sum within the agreed period.

Technology giant Apple recently unveiled Apple Pay Later, a service to let its customers pay for purchases in four installments over time without interest or other fees. With its enormous cash holdings and reams of loyal customer data, Apple can easily cut out third-party payment providers with its homegrown offering. 

Although the BNPL is open to all consumers, the highest rates of adoption can be found among millennials and Gen Zers.

The Asset recently spoke to Radek Jezbera, chief executive officer of Kilde, an alternative investment platform licensed by the Monetary Authority of Singapore, on the state of the BNPL business amid current market developments.

TA: Did the pandemic help or hinder the BNPL industry?

RJ: The pandemic did both hurt and help the industry. In the short term, it hindered the whole lending industry like the rest of the world. The surprise lockdowns, and complete shutdown of travel, hospitality, F&B, and retail services, caught everyone unprepared. For example, the BNPL companies we monitor suffered three to four months of cash-flow shortfall as large as one-third of expected repayments. 

Nevertheless, BNPL companies have tightened their credit scoring criteria, focused on the returning customers, and moved upmarket to higher-income customers who have suddenly felt the economic pressures. As the BNPL offering started in the e-commerce space, the boom of online shopping during the pandemic played an important part in introducing BNPL to new customers. 

BNPL brands rising

TA: Have the BNPL groups that have won or seized e-commerce deals from established credit/lending businesses managed to hold on to the gains?

RJ: Whoever owns the end-customer relationship commands the greatest power in the value chain. If the e-commerce business is offering credit financing options to their customers at the checkout, the BNPL provider sells an easily replaceable commodity. Money is still fungible after all. 

However, if the e-commerce business attracts the BNPL checkout financing because their customers already have that famous BNPL app on their phones, the power balance is very different. As a result, the large BNPL groups like Atome, Pace, and Kredivo are doing an excellent job of establishing themselves as brands on their own.

TA: If the inflationary environment is going to affect the purchasing power of consumers, can BNPL firms take advantage of this against their peer credit/lending rivals?  

RJ: BNPL turned the credit interest formula on its head. Unlike credit cards, where you need to pay an annual fee and interest on the loan, BNPL lets the merchants pay the cost of financing while keeping the product free for customers. Therefore, the inflationary pressures already affecting consumers' purchasing power could become another driver of BNPL adoption. The effect will be visibly felt once we see penetration of BNPL deeper into the mass-market consumer segments. 

Nevertheless, I see BNPL’s simplicity and convenience as the main competitive advantage against credit cards and point-of-sales finance.

TA: If BNPL becomes established as a mainstream payment option in Asia, who is the loser?

RJ: Great question! The whole credit card industry is the main loser, although the effect will be felt differently through the value chain. The shift of revenues from mainstream players to BNPL comes in two parts.

BNPL transactions at the merchant mostly happen in a so-called “closed payment loop”, bypassing the payment networks (think of Visa and Mastercard). The networks will still get at least part of their fees later when the customers pay installments with their debit cards. On the other hand, the “acquiring banks” that used to facilitate the card transactions at the merchants lose all their fees.

Lastly, the credit card issuing business in the banks is the ultimate loser to BNPL, as customers would stop applying for new credit cards and use them less. 

TA: What appeals most to users of BNPL versus credit card offerings?

RJ: The simplicity of BNPL is the critical factor driving adoption. The customer wants to buy new NB sneakers; during the checkout process, she is given an option to pay in three or four installments for zero fees. The only thing she needs to do is to download an app and undergo basic identity checks. 

This is in stark contrast with the credit card application process where she would need to supply income information, remember her credit limit, duration of the grace period, understand installment plans, late payment fees, etc. 

Travel sector potential

TK: What areas of consumer credit/lending can BNPL firms enter that they do not currently have a presence in?

RJ: BNPL is prominent in spontaneous purchases below US$250, especially in fashion and small consumer electronics. The next frontier is services like travel with flight tickets and hotels or cosmetic procedures.

TA: Which countries in Southeast Asia are currently the hotbeds for BNPL and where do you expect to see the most new growth?

RJ: BNPL is a near prime market; therefore, it naturally thrives in relatively more affluent countries such as Singapore and Malaysia, but the growth in those markets will be limited. Thus, the extensive growth will come from Indonesia, Thailand and Vietnam. We already see that prominent Southeast Asian BNPL brands are establishing strategic partnerships and opening offices in those regions.  

TA: Do you expect to see any banks or financial services firms in Southeast Asia move to acquire a BNPL firm?

RJ: We have witnessed purchases of BNPL firms by e-commerce platforms and payment gateways. In both cases, having your own BNPL as part of the checkout process makes a lot of sense. I think banks will push in to compete with BNPL by introducing split-payment options on their card products. 

We have not seen a BNPL firm acquisition by a bank because of the additional capital requirement needed to issue near prime loans. Banks will increasingly provide wholesale financing to the BNPL companies, though. 

TA: Apple has now joined the fray by offering its own form of BNPL. Do you expect to see other cash-rich global brands roll out their own offerings soon? 

RJ: Apple is uniquely positioned to offer its own BNPL because of the ecosystem they have built around iPhone and AppleID. Apple’s move validates BNPL’s value proposition and entrance into mainstream finance. We have seen Apple not shy away from disrupting its own products. Now Apple is competing with its own credit card.

The other global brands trying BNPL through partnerships may decide to create their own products. The obvious suspects are Amazon, followed by Google and Samsung.