Last year, when Buy-Now Pay-Later (BNPL) services erupted into the local market I did a story on whether customers are walking into a debt trap.
A year on, this trend hasn’t died out and BNPLs are still in the market. In fact, they are coming on stronger than ever and some observers have conceded that they are now a part of the payments ecosystem.
A recent report from Juniper Research predicts that BNPL purchases would take up 24 per cent of global e-commerce transactions (for physical goods in value) and account for at least 1.5 billion purchases in 2026. In comparison, BNPL purchases in 2021 were at 340 million and took up nine per cent of global e-commerce transactions.
For 2022, BNPL payments in Singapore are expected to grow 52.6 per cent on an annual basis to reach US$773.9 million, according to another analytics firm Research and Markets.
Today, popular BNPL service providers in Singapore continue to be Atome, Hoolah, Rely, Pace, Grab PayLater, and FavePay Later. Newcomers in this space include OctiFi and Split. There’s also Zip, which entered the Singapore market through an exclusive partnership with Singtel’s Dash this February.
The BNPL solution has emerged as an alternative credit payment for consumers, and has fast become a chosen form of payment for both merchants and consumers.
So what are BNPLs exactly? They are a form of short-term financing service that lets consumers spread the cost of their purchase across a few weeks or months, often without interest.
In the wake of Covid-19, such payment methods to obtain items before fully paying for them appeal to cash-strapped consumers and our “pandemic generation” as we have to tighten our purse strings due to the recession.
The BNPL trend is becoming “very mainstream”, according to Chayan Hazra, Head of Payment Business APAC, at Pine Labs.
A strategy that BNPLs use is to create targeted offers to customers, catering to what they need and are most likely to shop for, he said.
In an interview in September, Atome’s CEO David Chen said that the brand has more than 20 million registered customers and has disbursed US$1 billion (S$1.35 billion) over 15 million transactions. The BNPL startup was launched in Dec 2019 and has only been around for two years.
Looking at some statistics, we can see where the consumption of such services is coming from: In June last year, a study done by market research firm Milieu Insight found that millennials in Singapore aged 25 to 34 were the most likely to have used a BNPL app.
BNPLs are also targeting shopping basket sizes that are slightly more pricey but not over the top expensive.
The Milieu Insight research found that 48 per cent of BNPL basket sizes are, on average, S$100 or less. Taking a look at BNPL Atome for example, we can observe that it partners with more than 5,000 leading online and offline retailers in the region – such as Agoda, Sephora, Zalora, Zara, Aldo, Furla, and Marks & Spencer. The brands have product offerings that are generally priced in the mid-tier range, and are catered to middle-income consumers.
As more people work from home and go out less, merchants have to find new ways to re-engage customers to spend, and the BNPL solution fits consumers’ needs in this period, as they do not need to pay in full to obtain the products and services.
Merchants are also embracing this new payment solution as they don’t usually need to take on the risks of default, making it a win-win for them.
That’s because BNPL companies bear the cost of the products when shoppers select the option at checkout, and shoppers then repay the BNPLs in installments. The BNPL companies make money by taking a cut from the retailer, who is promised a boost in sales by offering the payment method to customers – on the merchants’ end, there is no loss if customers don’t pay up.
The strategy to take on the liquidity risks has proven successful for many BNPL providers for now, as they have scaled rapidly and formed extensive commerce ecosystems within their platforms.
As they grow larger, the BNPL players are transforming into superapps. That’s due to them ending up building ecosystems that have onboarded thousands of merchants and millions of customers.
The benefits of being such a “host” to millions of consumers allow BNPLs to look into consumer spending insights and customers’ shopping habits. These data insights can help them open up new revenue streams and create collaborative possibilities.
Other capabilities BNPLs can do include tapping on data insights to assess customers’ default risks and improve their debt collection processes. Such insights can also be tapped to help provide consumers with other financing capabilities, including banking.
We must also note that BNPLs attract millennials aged 25 to 34, and this suggests that the younger generation are preferring alternative forms of payment instead of credit cards and debit cards, making this an industry that’s disrupting traditional payment methods and a keen space to watch.
Investors too are backing the BNPL startups and are not shying away from this growth.In January last year, Grab Financial Group, raised US$300 million to further expand its financial services, including BNPL. Observers said that Grab has been leaning on financial services, including BNPL, to push up its bottom line, as mobility and food delivery segments are still far from profitable.Later in September, Atome’s parent company Advance Intelligence Group raised US$400 million, along with a deal with Standard Chartered for US$500 million in financing to boost its BNPL capabilities in the region.
In November, Singapore cashback startup ShopBack acquired Hoolah to accelerate BNPL offerings to merchants and shoppers. At the time, Hoolah had over 2,000 online and in-store merchants on its address book. In the same month, BNPL competitor Pace secured US$40 million to expand into Japan, Korea, and Taiwan.
There’s room for BNPLs to grow their market share within the commerce ecosystem. According to the Monetary Authority of Singapore (MAS), BNPL transactions in Singapore in 2020 accounted for S$114 million or less than one per cent of the S$92 billion in combined credit and debit card market transactions.BNPL Hoolah, which was launched in Feb 2018, for example, has been registering a substantial increase in transaction volume, sales value, merchant growth, and consumer growth.
In September, Hoolah said it experienced more than 1,500 per cent growth in transactions, over 800 per cent increase in sales value, and more than 400 per cent merchant and consumer growth during the pandemic.
The payment service has raised the eyebrows of some credit counselors and experts, who said that such solutions might lead to rising debt levels of young Singaporeans.
But for now, Singapore does not think that these BNPL schemes “pose significant risk to household indebtedness.” That’s according to Senior Minister Tharman Shanmugaratnam in response to a Parliamentary question on measures to regulate BNPL platforms in October last year.
“They are not yet widely used relative to other payment methods…Further, the current features of BNPL schemes in Singapore are effective in mitigating the risk of excessive debt accumulation by consumers. For example, BNPL users’ accounts are subject to credit limits. They will typically be suspended by the BNPL provider – that means no further use of that BNPL scheme – once a payment is overdue. Late payment fees apply, but these are typically capped,” said Mr Shanmugaratnam.
“As BNPL schemes do not charge compounding interest on the outstanding amount, the risk of rapid debt accumulation is also not large. As of end 2020, the total outstanding value of BNPL transactions was about S$12 million. This includes the value of instalments that had yet to fall due.”
The Senior Minister, however, noted that the MAS is assessing whether a regulatory framework is necessary to guide the evolution of BNPL schemes as they become more widely used in Singapore.
This could include the adoption of fair dealing practices by BNPL schemes. “For instance, clear disclosure at the point of account opening is helpful in ensuring that consumers are fully aware of the late fees chargeable if they do not pay on time. MAS has been engaging BNPL providers and has been reviewing the experience in other jurisdictions where such schemes are more prevalent.”
A report published this year by Research and Markets noted that “strongly funded BNPL participants dominate the market, and they might potentially push weaker participants out of business in the long run.”
With the competition intensifying, market consolidation is ongoing and expected to continue as bigger participants acquire smaller ones. “Domestic participants will embrace consolidation for more capital and market share to compete with leading global BNPL providers, which are expected to penetrate the market in the region.”
The research firm noted that BNPL start-ups with promising advanced technology strategies and investment support have established their bases and generated profit. It highlighted Atome, and overseas BNPLs Kredivo and Akulaku as such examples. “These providers aggressively expand their footprint in emerging markets to broaden their customer base while enhancing BNPL capabilities.”
Other BNPL stakeholders such as Grab’s PayLater have transformed their businesses to offer value-added services, including BNPL solutions, and create new revenue streams, the research firm commented. “E-commerce and mobile commerce critically drive BNPL adoption and will continue to do so in the long term.”
To stand out and thrive, BNPL stakeholders have to tap on next-generation technologies in lending and payments solutions, combined with big data, artificial intelligence, and machine learning, to deliver services more effectively and securely. “These technologies enable providers to map customer profiles based on credit history, spending habits, and social media analytics for a complete assessment of customer creditworthiness and risk to improve the credit underwriting process.”
The payments industry is now lucrative for start-ups to tap into new niche market segments and promote financial inclusion in groups with limited access to credit services from banks, it added.
Finally, it concluded that BNPL providers are likely to expand their service portfolio with holistic solutions. Other methods to increase growth opportunities will be through increasing collaborations between banks, leading regional payment providers, and local stakeholders, such as merchant aggregators, and payment acquirers.
Featured Image Credit: Atome, Grab PayLater, FavePay Later, Hoolah
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