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What Are “Buy Now Pay Later” Schemes And What You Should Be Aware Of
A new payment option has been growing in both prominence and popularity. Termed “Buy Now Pay Later” (BNPL), these schemes are essentially short-term instalment payment plans for everyday consumer items such as clothing apparel, skincare products, and even coffee machines. Consumers usually pay a third to a quarter of the full price upfront, while the remainder is split between instalments that are repaid monthly or every fortnight. Instalment payment plans are not new. Retails stores have already been offering such payment options for large and often expensive items such as furniture and high-end consumer electronics. What makes this new BNPL phenomenon stand out is that by bringing such a deferred payment model to lower-end consumer shopping, the target audience invariably leans towards the younger consumers who have more limited direct spending power. Of course, the other - arguably most important - feature of these schemes is that they are interest-free. With this target market, and the promise of effectively offering interest-free credit terms to those who do not, or cannot, have a credit card, companies offering BNPL schemes have become very popular in Southeast Asia. Klarna and Afterpay have become multibillion-dollar companies in Europe and Australia respectively. In Singapore, companies like Rely, hoolah and Atome have been set up while the incumbent banks have also begun offering similar interest-free payment solutions. About 38 per cent of Singaporeans, or 1.1 million people, have used a BNPL service, according to a report by financial comparison platform Finder. Who are the players in Singapore?
How does it compare to the Traditional Credit Cards Installment Plan?
Literally buying into the hype
The benefits of BNPL schemes for consumers as a payment method are pretty obvious. It provides near-instant gratification for anyone wanting to buy something without them having to worry about upfront costs and paying more through interest rates.
Banks typically perform extensive credit checks before extending credit to consumers. This means requiring things like proof of income for their assessment, and debt discussions etc.
But BNPL companies, in providing what is essentially an interest-free version monthly instalments of microloans, do not impose such credit barriers. In fact, anyone above the age of 18 can create a BNPL account with providers like hoolah and start adding to their shopping carts almost immediately. This gives consumers a lot more convenience in accessing funds.
There are also no annual account fees for BNPL services in Singapore for now, in contrast to most credit cards.
The option for flexible financing is also very attractive, especially in the wake of the Covid-19 pandemic where many people’s incomes have taken a hit. This allows them to spread their expenses out over a longer period of time, maybe until their income picks up again.
Naturally, any encouragement for customers to spend is most welcome for retailers and shops, but it will be viewed to be of paramount importance now as the world is facing a coronavirus-induced global recession.
In countries like the U.S., it has been found that nearly half of consumers said they spend between 10 to 40 per cent more when they use the “buy now and pay later” plan instead of a credit card. Locally, Atome reports that its merchant partners have seen a 17 per cent increase in the size of order on average, with a 30 per cent higher conversion at checkout. All this without the use of discounts or promotions, which means retail companies don’t have to cut into their profits.
Credit access also opens up new markets for some shops; younger shoppers might not have been able to afford to shop at certain brands, but are now able to do so by spreading out their expenses over instalments.
And perhaps most importantly, all these benefits come at no risk to the retail companies themselves. When consumers select the BNPL option at check out, the shop receives the partial payment upfront from the customer and the remaining amount from the BNPL company (minus commission, of course). Any money owed from the sale at that point is between the consumer and the financial institution, with the retail shop already accounted for. The latter doesn’t have to contend with any problems relating to future or default payments.
The unseen potential traps
This easy access to credit with interest-free payments must come with certain risks and caveats.
The most obvious potential pitfall is of course the fact that easy loans, even interest-free ones, can often lead to over-spending. The earlier report from Finder showed that 27 per cent of Singaporeans surveyed admitted to being financially worse off when using a BNPL service, with impulse buying being the most common mistake. About 11 per cent also said they have overstretched their budget so far that they “struggled to pay for other expenses”.
Allowing easy access to younger consumers who are often not as fiscally well-informed or financially independent no doubt exacerbates the consumer debt risk.
In addition, some understanding of the business model of these BNPL companies should also be undertaken.
While the instalment payment plan itself is principally interest-free and the companies earn through a cut from the merchants directly, there are also late payment charges imposed for failing to make repayment on time. These penalties are not always readily made known to the consumer, but can constitute quite a significant amount.
For example, Atome will freeze a customer's account and charge a S$20 admin fee if an instalment payment is missed. If this admin fee and outstanding payment are not paid within seven days, an additional S$10 fee is imposed.
Meanwhile, hoolah charges a S$15 late payment fee each time a customer fails to pay on time, capped at S$60. This applies to order values between S$100 and S$999.99. Fines amounting to more than half the value of a S$100 purchase must represent some of the highest returns that no loan interest rate can match.
These late payment fees constitute a sizeable proportion of BNPL companies’ revenues. About 1 in 5 Australians have missed a BNPL payment, which goes a long way in explaining why Afterpay's latest full-year revenue of A$519.2 million includes A$69 million from late fees. In Singapore, Finder’s survey has shown that about 9 per cent of BNPL users have had to pay a late fee for missing payments.
It probably does not help as well that BNPL falls under a regulatory grey area in Singapore, allowing them to behave in certain ways that traditional moneylenders cannot. Since these firms are not lending money directly to consumers but by providing funding to merchants in lieu of deferred payments from the consumers, they do not technically come under the purview of the Moneylenders Act.
The Act mandates that marketing material must be "clear and easily understood" by the audience and must not contain information that may mislead or deceive, among other rules meant to protect the consumer.
Aggressive marketing promises rapid growth
Ads and marketing campaigns for BNPL have been heavily centred upon it being a convenient and flexible payment option. Companies have also been offering tempting benefits, often in partnership with established and popular brands.
In its recent Chinese New Year promotion, hoolah ran a 8 per cent cashback promotion and a chance to win S$88 if users uploaded a picture of their purchases on Instagram. It also has longstanding partnerships with iStudio, Samsung, and retail giant BHG.
Meanwhile, Atome has partnered with CapitaLand’s CapitaStar rewards programme such that using Atome’s BNPL in selected CapitaLand malls will allow the consumer to redeem a certain number of reward points. Other partnering brands include Sephora and Hush Puppies.
As consumers are increasingly being incentivised to take up BNPL when checking out at mainstream retail and brick-and-mortar stores, the payment option will also likely become regarded as a conventional payment option.
Exercise spending with caution
Ultimately, it cannot be denied that borrowing money interest-free is probably the best form of loan there is. But one should not be fooled by the slick marketing, and convenience brought on by the incorporation of (perhaps, to some) exciting new technology; the pitfall remains exactly the same – the consequences can be dire if you do not repay the loan.
Until the authorities find a better balance between regulating financial stability and encouraging innovation (and one might disagree with them over what that balance may be), do not expect a lot of hand-holding in navigating through this type of payment option. The onus is on the consumer, even the ones as young as 18 years old, to read the terms and conditions of these payment schemes carefully and be very clear on what they are getting into before making a purchasing decision to buy now, pay later.
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