Nine out of ten people in Southeast Asia don’t have credit cards — a statistic that underpinned a lot of the discussions in DealStreetAsia’s recently concluded webinar on the ‘Buy Now, Pay Later’ (BNPL) phenomenon.
BNPL had gained ground across the world in the wake of the pandemic, offering relaxed payment options to consumers. In the US, 60% of consumers had availed of the service; while in Australia, the figure stood at 30%, said analyst Angus Mackintosh, founder of CrossASEAN Research, Insight Provider on Smartkarma. He felt the numbers for Asia were likely to be lower.
Chris Yeo, managing director, head of GrabPay & GrabRewards, Grab Financial Group (GFG) highlighted an aspect which was likely to accelerate the growth of BNPL in the region. He said, “For Southeast Asia, it has more of a financial inclusion angle, being the first exposure to digital instalments.” With cashless transactions in Southeast Asia pegged at only 17%, Yeo felt there was a lot of headroom for growth across the fintech and financial inclusion categories.
Interestingly enough, BNPL was being used to purchase a wide assortment of typically high-ticket goods and services. Dheeraj Chowdhry, chief business officer – Southeast Asia for Pine Labs said, “We are seeing a lot of white spaces getting picked up. People buy tires, treatments at beauty salons, cosmetic surgery and insurance. People are using BNPL for a $40 purchase at $10 a month at Uniqlo. It’s no longer about the size of the purchase but convenience and customer experience. It’s giving a 20% plus lift to merchants in ticket size.”
While bullish about the potential, the panel acknowledged that there were hurdles that would have to be surmounted before BNPL caught on across the region – one of which was insufficient data. However, Mackintosh pointed out that there were multiple sources of data in Indonesia, which could be harnessed to determine the creditworthiness of a potential consumer. He said, “There is a strong credit bureau and if you are onboarding someone new via BNPL, a lot of information is available via the identity card, or data from platform transactions. BNPL limits vary depending on where people live. Residents of a small apartment block in central Jakarta may get a higher rating than if they lived in Bekasi in the suburbs.”
Yeo believed Grab was better placed to handle this due to an abundant access to first party data from its vast array of services. He said, “Thankfully, we’ve got high quality, high frequency transactional data from transport, food deliveries and rewards, ingested into our risk assessment system. We do not rely on whether you have a credit card or not, which is what some players are doing. We just assess your transactions with us, plus a host of other data points to say ‘yes’, ‘no’ or ‘how much?’ It’s completely personalised and will enable us to scale to the rest of Southeast Asia.”
Titled ‘How BNPL has unleashed the potential of the emerging Asian consumer’, the webinar was sponsored by Grab Financial Group. It was moderated by DealStreetAsia editor-in-chief Joji Philip.
Click here to watch the video of the session or read a transcript of the webinar which has been edited for brevity and clarity:
What’s the data telling us about BNPL? Is it really as big as its being made out to be?
Angus Mackintosh (AM): When I first started looking at many of the digital economy stocks, like Gojek, Tokopedia and Grab, they were very small. I first met Tokopedia five years ago and they had only raised about $136 million. There has been a rapid change. The ongoing pandemic has accelerated adoption in areas including e-commerce, ride hailing, food delivery and online groceries.
A lot of digital economy companies are looking to get involved in the financial side of things: digital finance and fintech. Hence the huge flow of funds looking to get exposure in that space.
More recently, BNPL has become a very attractive area for P2P lenders like Akulaku and Kredivo; as well as banks. BNI in Indonesia has already teamed up with Traveloka and Shopee to offer BNPL. As an alternative to credit cards, its more easily accessible and democratising consumerism.
Chris Yeo (CY): Apart from the underserved and unbanked, the other interesting statistic is that nine in 10 people across Southeast Asia don’t have credit cards. Singapore’s an outlier. China is the global benchmark for cashless transactions at about 43%. In Southeast Asia, it is only about 17%. GFG and GrabPay are committed to the region because of this massive headroom in terms of fintech and financial inclusion. One key difference is that China is a homogenous market, while Southeast Asia is highly diverse and fragmented.
Some opportunities come from being hyperlocal. There are also structural tailwinds: acceleration due to COVID-19, e-commerce, as well as cashless payments and adoption. The third really important factor is that regulators are quite forward-looking. There are differences in each country, but it is very important for all fintech players — including GFG — to work with them. We try to serve our customers and merchants much better in terms of really leveraging this opportunity.
GrabPay started three or four years ago as a payment method embedded within the ecosystem for transport and food delivery. Our strategy moving forward is to serve off-platform merchants and customers much better. Today, 40% of our TPV (total payment value) is off-platform which we see growing further. Our journey has just begun.
Have the new developments in fintech created a fresh cycle of consumption in this part of the world?
Dheeraj Chowdhry (DC): India is a great representation of evolution in payments. It started in 2016 with the launch of the Universal Payments Interface (UPI). The whole regulatory environment contributed as a tailwind.
The digital economy has a 23% CAGR because of innovative products coming in, rising smartphone penetration and e-commerce growth in India. I was amazed when transactions on UPI crossed $100 billion in October. That’s the extent of digital payment growth in India.
And it is not an outlier: across Southeast Asia, e-commerce is growing by 80% CAGR. All this is obviously contributing to a new cycle of consumption. Uni-channel businesses are moving to become omni-channel. Earlier, digital payment was the mantra. Now, it’s becoming contactless, invisible and instant. Physicality is no longer important since businesses have a cloud presence.
What are the differences between global players in BNPL, compared to their Southeast Asia counterparts?
AM: Big players like Afterpay and Klarna, have done pretty well in terms of assessing risk. You may have funding and found consumers through merchants, but assessing the risk profile of a consumer is still key. The difference in developed economies is that you probably have more information. You can see what the spending patterns are like, whether individuals have borrowed too much in the past and not paid back.
Interestingly enough, in Indonesia there is a strong credit bureau and if you are onboarding a new consumer via BNPL, there’s a lot of information via the identity card, or data from platform transactions. BNPL limits vary depending on where people live. Residents of a small apartment block in central Jakarta may get a higher rating than if they lived in Bekasi in the suburbs.
And so, there’s more background information in Indonesia than you would think would exist in a less developed market. The prospects are reasonably good. Some of the big players have said that their nonperforming loan (NPL) rate is less than 1%, which is pretty respectable — similar to a mortgage loan. And remember, this is unsecured lending on consumer goods. Lessons have been learnt from more developed economies, where the take-up has been huge. In Southeast Asia, we are at the very early stages of development, but it’s growing quickly. I mentioned 80% growth in e-commerce and that’s what we have projected this year for BNPL in Southeast Asia.
Fintech lending has existed for the last couple of years. It was called instalment lending. What’s different about BNPL?
AM: The key is that a BNPL loan — not universally but to a large extent — doesn’t have any interest attached to it. The consumer themselves doesn’t see any charges. They just pay over a period of time. It might be one, three or even six months.
The BNPL company makes money through the merchant discount rate, which can be between 4% to 8% depending on product. Big ticket items may have a slightly higher discount rate attached. It is the way for the merchant or retailer to generate more sales. This has been used quite often in Western markets: there might be a broader or higher merchant discount rate, but some of that can be assigned to marketing. As BNPL apps develop, there will probably be quite a strong marketing component. They will have other services attached. The app will direct you to various different retailers and merchants; another charge that the merchants can levy on the retailer.
When you consider BNPL trends globally, how different is it at Grab?
CY: The differences from global trends are in a couple of areas. National data and credit scoring does exist to a certain extent, but varies from country to country. There is some difference in terms of data availability.
The second point is that for Southeast Asia, BNPL has more of a financial inclusion angle. For nine out of 10 consumers, the first exposure to digital instalments is BNPL. Therefore, there is a potential to leapfrog.
Southeast Asia is also really nascent — we expect more players and consolidation. The tech ecosystem here is quite different, with the presence of superapps. Therefore, the competitive dynamics and evolution will be different.
For Grab, the first important part is data. Thankfully, we’ve got a high amount of high-quality, high-frequency transactional data from transport, food deliveries and rewards. It is ingested into our risk assessment system, and therefore we don’t rely on whether you have a credit card or not, which is what some players are doing.
We just assess your transactions with us, plus a host of other data points to say ‘yes’, ‘no’ or ‘how much?’ It’s completely personalised. It will enable us to scale to the rest of Southeast Asia.
The second thing is the scale of operations. Very few players have the licenses that GFG has across major markets. For Grab, GFG is not just a means to accept payments within transport and food. It is a fully dedicated business unit. For us to cross-sell and leverage our ecosystem is really easy.
Since Southeast Asia is not homogeneous will you be building different solutions, partnerships and offerings for each country?
CY: There are two angles. From the tech perspective, you need a horizontal platform, so you can scale your solutions across markets. The incremental costs and time to roll out an existing product in new markets is much lower.
But in terms of customising, operating, and executing, that’s where Grab is going very deep in each country. We are 110% hyperlocal. That means being deeply embedded with operating teams and localised partners. We have over 60 partners among financial institutions like Maybank in Malaysia and Krungsri in Thailand.
When you look at India and Southeast Asia, what are the similarities and differences?
DC: India has historically had a very unorganised credit society. At Pine Labs, we’ve enabled maybe 250,000 merchants for BNPL and contribute to about $2 billion of the $3.5 billion in BNPL transactions in India.
It was waiting to happen since there was a lack of infrastructure and technology to pull the credit society from unorganised to organised sector.
Another reason is internet penetration. India has an internet user population of 800 million. It gives a huge impetus to BNPL. It’s at a take-off stage. The numbers are supposed to go to $40 billion by 2025. Globally if I remember right, it is a $100 billion market, supposed to grow to $700 billion. India from that perspective is not so small, even at present
We will replicate the India story into Southeast Asia very soon.
How does a BNPL player stand out as a product rather than being just a feature?
DC: There are three sorts of BNPL players. The first are standalone– Hoolah, Affirm or Klarna. The second is super apps such as Grab which rely on more than one revenue stream and can provide the customer with a much larger experience. The third model stems from banks getting disintermediated. Now they are coming back into the fray and we are enabling them to do so. It will be quite different — a seamless experience with no registration required. Of course, it’s it doesn’t address the unbanked segment, but it will address debit and credit card customers.
Obviously the first one that I’ve mentioned is most vulnerable to commercial disruption. The players are valued maybe 50 times more than a traditional bank, but they’re still in the red.
If you overlay the customer segments using these players, it is probably GenZ using standalones; millennials who are more tech savvy using superapps and Gen X with the bank related products. There’s enough room to differentiate, depending on which customer segment you go after.
How will fintech companies become serious competitors in BNPL?
AM: P2P lending is being disintermediated by digital banks. At the same time, digital banks are also looking for opportunities to build their own loan portfolios. Rather than go out and spend lots of money acquiring new customers, they are funding P2P lenders and BNPL. Standalone players will look to grow into different areas. They are looking at acquiring or already have acquired a digital bank – like Akulaku Bank.
At the same time, the mainstream banks who you might imagine are losing out are getting more involved. While credit card lending is still growing, it is not moving as fast as we think. There are actually very few credit cards in places like Indonesia — only 17 million. That’s a small number, but there are probably only 9 million card holders and individuals, which is even lower, given a population of 270 million.
Some banks used to require you to actually have a deposit in your account to mirror your credit card limit. And while it has become easier, it’s still not easy to get your first credit card. It’s easier to get your second card, but if you’re in that position, you are beyond the financial inclusion market.
What BNPL lenders do is enable the man on the street. It’s not saddling the consumer with additional debt, which might attract the attention of the regulator, but is enabling individuals and potentially SMEs.
Was food delivery an ideal target for BNPL, given the high volumes? Or are the margins too narrow?
CY: Our food business has been growing well during COVID-19. But what we have seen with our BNPL product is that we target e-commerce: fashion, beauty, electronics, and home living. In general, there’s more attraction for bigger ticket sizes. Merchants are willing to pay a higher commission because of the additional value in sales and potential new consumers that BNPL can give them.
Is a company like Grab which offers BNPL as an additional feature better off compared to companies that offer it as a standalone product?
CY: We see it as complementary and additive: an important tool to serve merchants better. Merchants have many pain points in Southeast Asia. During COVID-19, micro plus merchants who thought of going online did it just to survive. At GrabPay, we onboarded three times more merchants in the second quarter this year versus last year. And a lot of them are asking us about how we can help them go online faster.
This is one of the reasons that we keep increasing the suite of merchant products on offer – for instance, GrabMerchant Commerce.
How do we help them increase their sales, so that when they do better, we do better, and everyone wins? How do we connect merchants with the 25 million monthly transacting users in the Grab ecosystem? That’s why we rolled out another product which is basically a shopping feature to connect small and micro merchants directly to our consumer base.
And of course, for consumers, it is an additional product. A lot of them who are now using our BNPL product were originally GrabPay customers. That helped kickstart our flywheel.
Most of the merchants in Southeast Asia and India operate on thin margins. Will that lead to BNPL being concentrated on the top few 100,000 merchants?
DC: There is an underlying assumption that BNPL only relates to 0%. But it does not imply no interest rate. There is a whole market where the consumer is willing to take up the interest cost. Just the fact that you can split the purchase into X number of instalments is a good enough proposition.
The merchant anyway is not funding it. It’s a technology or capability issue. In the last research that we that we did, six out of 10 people are willing to pick-up higher value purchases, even if they’re charged a little fee. It’s all about the affordability curve.
BNPL thrives on high margin discretionary products. What’s the equivalent for this in Southeast Asia and India? Is it mobile phones or gadgets?
DC: We are seeing a lot of white spaces getting picked up by BNPL. People buy tires on instalment. Beauty salons, cosmetic surgery and insurance are huge segments. It’s not about the electronics or the gadgets or product category. It’s about how you can actually offer a solution to the customer. People are using BNPL for a $40 purchase at $10 a month at Uniqlo. It’s no longer the size of purchase but convenience and customer experience. It’s giving a 20% plus lift to merchants in ticket size.
Do you see standalone BNPL players in Southeast Asia surviving?
AM: The ones that survive can offer a number of different products. They may be backed by or own a digital bank, or have a very straightforward source to funding. It’s harder for them to generate that funding if they are standalone.
In Indonesia, if you’re in a multi finance company, the minimum funding for the most efficient of them with the best credit risk record etc is about 8.5%. That’s a relatively high level of funding cost. The cost of the banks is now ultra-low in Indonesia —less than 2% for many of them. If the banks decide to come into this space, they have an inherent advantage versus a standalone player who has to seek out more expensive sources of funding.
For Grab, you can best utilise BNPL and other fintech when you are integrated, because you’re trying to be a full-fledged financial institution?
CY: The ability to cross-sell is very important. For our financial products, we always think of ways to lower the barriers of entry to make them more accessible and affordable. Being embedded in the Grab ecosystem certainly helps. For instance, when we rolled out microinsurance, from April 2019 to March 2021, more than 130 million micro-insurance transactions took place on the Grab app.
But ultimately, whether it is extending BNPL to consumers and merchants, or even to cross-sell and develop new products, it is all about quality of data.
New digital banks and fintech arms of unicorns in Southeast Asia, have a huge advantage because of ecosystem support. How do you see the consumer lending space in Southeast Asia change over the next couple of years?
AM: Some of these newer digital banks, especially the ones attached to big unicorns and larger players, will do well. But a lot of digital banks are being set up, and I’m not sure whether they have the capacity to get their claws into the consumer, as easily as an e-commerce player or ride hailing company.
Bank Jago is attached to Gojek and Tokopedia and there are a number of merchants sellers who can be targeted as potential customers. You can obviously market through those platforms as well. They have the financial wherewithal to fund growth.
But don’t forget the big banks are also competing in the same space and are not going to lose that much. The small and medium banks will probably lose out and be unable to compete.
The new digital banks will have a very forward looking and efficient product offering, targeting the young population.
Some bigger banks are doing that very thing. They will not necessarily target the consumer, as much as the small merchants in the market.
Some of them will succeed and the landscape will change, but that will be to the detriment of small and mid-sized banks, which would often be acquired anyway for the banking licence to be turned into a digital bank.
At the moment, a lot of those costs have been taken by the retailer. And the retailers are really seeing the benefit of BNPL in growing their own sales. Mitra a retailer in Indonesia with 150 brands are seeing a huge boost in online sales due to their collaboration with Atome, a Singapore based BNPL. It’s really happening everywhere.
A few questions from the audience. What is the default rate on payments within BNPL?
CY: We are very cognisant of default rates and monitor and tweak that constantly. We follow a whitelisted approach using our credit risk engines. We move it up and down depending on what our approach is for each of the countries and markets. We are very comfortable with the default rates right now.
DC: For Pine Labs in India when I said we do $2 billion of BNPL, we are enablers. The credit risk is coming from the banks. These are existing credit lines that have been converted to BNPL. We are really not taking credit risk. The question of NPA doesn’t arise.
What do you think is the regulatory outlook for Southeast Asia against the backdrop of what’s happening in China?
CY: Regulators are actually pretty progressive. We’ve seen their initiatives in real-time payments, taking lessons from India’s UPI in terms of interoperability, not just on a domestic basis but across borders. This lowers the cost of transactions and reduces friction.
If we pick BNPL, there are some questions around that. It is very important that all actors behave in a responsible way. With this being the first exposure to instalments for a lot of Southeast Asian citizens, it ought to be trustworthy. Players need to work with regulators to manage national agendas, consumer protection, and also promote innovation with very specific policies.
We are very careful about who we offer instalment products to. We use tech to ping them when payments are due and stop transactions when they default. We also work with regulators and national organisations to educate about using BNPL.
The most important thing is for all the players to act together to maintain that trust level so that the ecosystem can really grow
DC: For any business running so fast in the northward direction, obviously regulators are concerned about responsible lending. It’s a tightrope walk: responsible behaviour that all players need to adhere to. If not, regulators will put up guardrails, which will obviously stop the growth trajectory.
My final question to all the three panellists: what is your prediction for 2022?
DC: First of all, cross-border real time infrastructure will be the next frontier open to the internationalisation of fintechs.
Competitors will become collaborators. I don’t think anybody has the time to develop everything. It’s best to create synergies among like-minded companies and get the equation right. The third prediction is blockchain will become mainstream, with many more use cases.
CY: For 2022, I’ll just focus on BNPL because we are so excited about it. We see continued adoption leading to greater convenience, and hopefully financial inclusion for the underserved Southeast Asian market.
Promotions and offers will remain prevalent. Firms will need to think about ways to make the economics work and be sustainable. We see some consolidation. After which, it is very important to keep our eyes on value. How do we, as BNPL players, really demonstrate consistent and strong value to merchants? Everyone increases sales on Singles Day and it’s easy to demonstrate that benefit. But can we demonstrate it day-in-and-day-out? Those who can give efficient value to customers and merchants in the long term will win.
AM: In the US, 60% of consumers have used a BNPL service. In Australia, it is about 30%. I’m not sure what the use case is in Southeast Asia at the moment, but it’s much lower. There will be increased adoption and availability. You will see some listings and more scrutiny on the sector.
There will be growth and new entrants – payment gateway companies like Zendesk for example and more local banks, especially in Indonesia. They have an inherent advantage given the very low cost of funds and their ability to manage risk.
For more information on Grab Financial Group and its suite of products including BNPL, please visit the official site