This article first appeared in Wealth, The Edge Malaysia Weekly on February 22, 2021 - February 28, 2021
The growing availability of “buy now, pay later” (BNPL) services is raising concerns that many users may be caught in this new debt trap in the long term.
BNPL options are appearing across a wide range of retail industries in Malaysia, from fashion to travel, offering alternative payment methods and, in some cases, on an interest-free basis. The trend, accelerated by the coronavirus pandemic and exacerbated by rising income inequality, has been a boon for many looking to stretch their ringgit and avoid taking on additional long-term debt.
The ingenuity of BNPL is that the service presents credit terms to those who do not have a credit card, prefer not to use one or cannot get one. For many, this service enables them to buy necessities that they otherwise would not be able to afford all at once.
The trouble is that many of us tend to indulge in our wants and splurge when BNPL services are so readily available, says Felix Neoh, director of financial planning at Finwealth Management Sdn Bhd. “It is easy to succumb to instant gratification, which means there is a high chance that purchases made in that frame of mind could lead to unhealthy spending.
“In the past, before we could shop online as easily as we do today, we would actually try to delay gratification, which gave us time to evaluate our wants and needs. If I were eyeing a pair of branded shoes that cost RM600, I would mull it over before spending, especially if there was an alternative pair that cost RM100. But now that I have the option of paying RM100 over six months for a luxurious pair, I would subconsciously feed my wants rather than focus on my needs.”
In the long term, people could become flippant about piling on debt and end up being trapped in a vicious cycle, he adds. “The thing is, because it is so easy to get this kind of credit and you are paying for your purchases on a monthly basis, the surplus cash that you could be investing or saving for your financial future has to go to making repayments.
“There is that risk of living beyond your means — that’s when the debt trap happens. If it gets worse, you may be in a situation where you have to take one loan to cover another. The impact is worrying because if you get too used to doing it all the time, it would become second nature.”
Unlike taking out a credit card, when you opt for a BNPL service, there is no requirement to fill out a detailed application form or submit documents proving your income or ability to repay outstanding amounts. Most BNPL providers do not conduct credit checks as part of the application process. The option is offered to users based on their repayment history, demographic information and basic financial information.
The ease of access could become the BNPL service’s biggest drawback as ease of access to credit has far-reaching consequences. If left unchecked, it could result in a new kind of debt trap, Neoh warns.
Reinventing affordability
But BNPL options are not all bad. The service is an inexpensive way to borrow money for short periods.
In theory and design, it encourages timely repayment behaviour and helps users free up their cash flow, says Nor Akmar Yaakub, head of financial education at Credit Counselling and Debt Management Agency (AKPK). “It is a good option for emergency or unexpected purchases as approvals are fast and easy, as there aren’t any credit checks.”
Consumers are now able to space out interest-free payments debited from their bank account or credit card over three, four or six months. And as BNPL transactions are cashless, they are also safer and more convenient.
For those on a tight budget, particularly cash-strapped millennials and Generation Z, the service removes one of the biggest obstacles to online shopping. The pay-by-instalment solutions have also helped non-essential retailers, especially luxury brands, stay afloat as their platforms have been able to efficiently process more transactions online during an economic downturn, and at a lower level of return risk from lack of payment.
According to a report by Worldpay from FIS, BNPL is one of two online payment methods expected to gain global market share between now and 2023, with the other being digital and mobile wallets. The Global Payments Report 2020 released in January last year notes that across Asia-Pacific, e-commerce transactions using BNPL are expected to more than double during the corresponding period.
“The only other online payment methods we forecast to gain market share include Affirm, Afterpay and Klarna. We forecast that these services will account for nearly 3% of global e-commerce spend by 2023,” states the report.
While BNPL services are still nascent in Malaysia with only a handful of active providers, it has grown by leaps and bounds in Singapore over the last five years. Financial comparison platform Finder.com states that 38% of Singaporeans, or an estimated 1.1 million people, have used a BNPL service.
Over a quarter (27%) of Singaporeans aged 16 and above — equivalent to 783,000 people — admitted to being worse off financially due to a BNPL mistake, says Finder. “The most common BNPL faux pas is making an impulse purchase, with nearly one in five Singaporeans (17%) admitting to making this mistake. The next most common transgression is buying a more expensive item than you otherwise would have (15%).
“Worryingly, a whopping 11% say they have overstretched their budget so far that they’ve struggled to pay for other expenses. About 9% of Singaporeans have had to pay a late fee and 7% have had their bank account go into overdraft as a result of BNPL use.”
The popularity of the trend is such that regulators in the UK and Singapore are reviewing the service amid concerns of rising consumer debt.
However, checks with Bank Negara Malaysia, the Ministry of Housing and Local Government and the Ministry of Domestic Trade and Consumer Affairs revealed that BNPL services are currently unregulated and there is no indication of the relevant agencies looking into the matter.
This is because BNPL falls within the ambit of a factoring agreement, explains Izwan Zakaria, managing partner at Izwan & Partners, which specialises in handling matters related to the technology, venture capital and start-up space.
A factoring agreement is where a BNPL operator assumes a retailer’s risks by getting the retailer to assign its receivables, such as payments from customers to the retailer, to the BNPL operator instead on a deferred basis. “After [the receivables] are assigned, customers will then pay the BNPL operator instead of the retailer based on a scheduled repayment scheme, usually on a monthly basis, in accordance with the new terms of sale agreed between the BNPL operator and the customer.
“In exchange for doing this, retailers would be able to, firstly, reduce their inventory stockpile such as unsold products and, secondly, drive more sales,” says Izwan.
Under the Financial Services Act (FSA) 2013, leasing, factoring or hire-purchase businesses would no longer be subject to the supervision of Bank Negara. While such businesses require neither approval nor registration, they are subject to the regulatory oversight of Bank Negara. “Be that as it may, Bank Negara still exercises regulatory oversight over these businesses and can regulate them if they pose a risk to financial stability,” says Izwan.
This is why BNPL operators usually only accept debit or credit cards as payment methods — which reduces the risk of default and ensures consistent repayments.
“Additionally, the BNPL operators, as part of their internal risk management, may check a merchant’s exposure limit, product risk and existing transactions. When it comes to customers, BNPL operators may look into a customer’s purchasing pattern and so on,” says Izwan.
In Malaysia, digital travel platform Agoda, ride-hailing unicorn Grab, e-commerce giant Shopee and popular modest lifestyle brand FashionValet have partnered with various BNPL financial technology (fintech) firms to offer flexible instalment plans for accommodation bookings and purchases. While Agoda and FashionValet have tied up with Singaporean start-ups Atome and hoolah, Grab and Shopee have introduced their own version, dubbed PayLater and SPayLater respectively.
There are varying conditions to qualify for micro-loans via these platforms but generally, one has to be at least 18 years of age, be a Malaysian citizen with a valid MyKad, own a local mobile number and have a credit or debit card that will be used to pay for one’s purchases. A cursory check reveals that the maximum transaction limits vary and only a few offer in-depth information on payment plans and fees.
Purchases using SPayLater, for instance, are capped at RM3,000 but will differ from user to user and are determined by various factors, such as spending behaviour and purchasing pattern on Shopee, as well as repayment history.
SPayLater features four payment choices: BuyNowPayLater and monthly instalments of two, three and six months. Users opting for the BNPL option will have to pay the full amount of their purchases in the following month, with no fees charged. Those who opt for monthly instalments will need to pay a 1.25% processing fee on their order amount each month.
SPayLater users must also make sure to settle their bills within the stipulated time frame, or they will be charged a late payment fee of 1.5% each month on the overdue amount. According to Shopee’s FAQ, all payments must be made by the 10th of every month.
In contrast, PayLater in its FAQ simply states that every user will be assigned a unique PayLater limit and changing of the spending limit is not available currently.
So far, BNPL services in Malaysia are limited to online purchases. Even so, both Neoh and Nor Akmar concur that the “zero interest” layaway service risks creating a false sense of affordability that could introduce bad debt.
The truth is that the most effective way to build wealth and increase one’s net worth is to make use of the time we have in our early years, says Neoh. “And over a period of time, as you save and invest, you are able to take advantage of compounding interest and manage risk through diversification.
“But if you are stuck in a debt cycle, you will be missing out on all those opportunities. If you spend all your surpluses on too many non-essentials in your youth, you are letting time slip away.”
There is also the problem of post-purchase regret, says Nor Akmar. “Online shopping can easily influence your purchase decision and you end up buying things you don’t need because they were cheap during the promotional campaign.”
Ample data and statistics have shown that Malaysians, specifically the younger generation, are piling up debts and risking bankruptcy by turning to banks for loans and credit cards.
The RinggitPlus Malaysian Financial Literacy Survey 2020 that was released on Nov 10 last year, for example, found that 53% of Malaysians cannot survive more than three months if they lose their jobs while 46% spend more than they earn. Perplexingly, 76% of them claimed they were in control of their money.
In 2019, the World Bank Group in the 21st edition of its Malaysia Economic Monitor raised increasing concern about bankruptcy among those aged 25 to 34, highlighting that 60% of bankrupt borrowers were within this age group. The study stressed that millennials specifically spend well beyond their means due to “impulse-buying behaviour, easy access to personal loans and credit card financing, the want for instant gratification and seamless online purchasing”.
Decisive financial goals are key
“Ultimately, it comes to knowing thyself. Analyse your personality and understand your temptations and desires. This will require having an honest conversation with yourself and then adopting the kind of strategies that will help you control your spending better,” says Neoh.
Second, set clear and attainable financial goals. “Financial goals are good motivators for you to ensure that you are sorting out your savings and investing to achieve your aspirations. It is when you don’t have clarity on the cost of debt that you succumb to taking on debt,” he points out.
Striving towards responsible affordability
Amid concerns that “buy now, pay later” (BNPL) services risk exacerbating debt constraints faced by Malaysians, BNPL firm hoolah hopes to encourage “responsible affordability”.
Stuart Thornton, co-founder and CEO of the Singapore-based company, tells Wealth that hoolah wants to help people buy responsibly to ensure they do not find themselves trapped in debt. “We’ve created this context of ‘responsible affordability’. It is part of our vision, and it has always been our strategy since we founded the business.
“This is one of our biggest differentiators when it comes to hoolah’s take on BNPL — we look at BNPL as a way of [achieving] responsible affordability. We want to allow customers to make an investment into quality products and lead the lifestyle they want or aspire to, but at the same time, make sure they don’t fall into debt.”
It is okay for people to want things and to shop, as long as it is done responsibly, Thornton asserts. “It’s really about allowing customers to take control of their spending rather than overspend. There are instances where we have rejected transactions when we think people are moving towards the wrong direction. It’s our responsibility to make sure we help consumers and, especially, provide education around personal finance and financial literacy.”
Unlike the prevalent models of lending or credit, hoolah removes the issue of price and cash flow by providing a more flexible solution that enables consumers to split their purchases into three interest-free monthly repayments, he says. The platform helps users utilise existing credit or debit payment instruments from any financial institution, at no additional cost and with no hidden fees.
“We believe that it’s okay for consumers to want and need things. What’s important is that people buy responsibly. It’s a smarter way to pay, especially in these times,” he adds.
For merchants, the BNPL platform hopes to help businesses recover and aid their future growth, says Thornton. He points out that hoolah enables merchants to engage new consumers, drive conversion and sales, increase basket size and help enhance the likelihood that consumers will come back again because split payment options are available.
“At hoolah, we pride ourselves on taking on the responsibility of educating the consumer and offering a transparent solution. There are no hidden fees, no processing fees and no interest. Everything is automated — users get timely reminders and they can return their items for a refund or make early repayments at any time, without any additional fees. We communicate with our users regularly, reminding them of payment dates and treating them respectfully through the process,” he says.
“We also dynamically cap orders based on our proprietary engine risk assessment. This means we actively ensure that users do not overuse the platform and when the cap is hit, they will need to pay off outstanding instalments before they can use hoolah to place a new order. New users, especially, will have more stringent limitations on their active orders at any one time, to prevent them from overspending.”
In keeping with its responsible lending obligations, hoolah has taken a proactive approach by producing content that offer budgeting tips, personal financial management and best ways to manage one’s finances. “Ultimately, we provide a lifestyle solution for consumers, which means working with a broad range of merchants. Debt is not a preferred lifestyle,” Thornton stresses.
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