BNPL is booming in SE Asia but faces regulations, crowded market

Images of how Pace's app looks like. Source: Pace.

Mirroring global market trends, the buy-now-pay-later or the BNPL model that allows customers to shop for smaller-ticket items on installments is becoming a fast-growing phenomenon in Southeast Asia if deal activity and consumption trends are an indicator.

Earlier this month, Temasek-backed cashback player Shopback announced it had acquired Singapore-based BNPL startup hoolah for an undisclosed sum. Weeks before this deal, Standard Chartered Bank announced an investment of $500 million in Atome Financial – the BNPL arm of Advance Intelligence Group – as part of a 10-year partnership.

The global bank also followed it up with another collaboration with Indonesian BNPL player, FinAccel’s Kredivo, a company headed for a $2.5-billion SPAC listing.

Standard Chartered’s global head of partnerships Marnix Zwart said in an e-mail response that the BNPL tie-up will allow consumers to pay for smaller-ticket items like shoes, bags, or cosmetics at a larger range of both online and offline merchants, unlike the bank’s usual credit plans typically available for larger-ticket items like furniture and electrical appliances.

Southeast Asia is just one region witnessing the BNPL frenzy with players and investors betting on the e-commerce boom fuelled by the pandemic and the younger generation’s propensity to spend.

Globally, the BNPL space has seen mammoth deals including Afterpay’s $29-billion acquisition by Square and PayPal’s $2.7-billion deal to buy out Japan’s Paidy apart from the successful listing of Affirm and Swedish fintech giant Klarna’s huge valuation jump from just $5.5 billion in August 2019 to more than $45 billion two years later. In April, India’s Pine Labs paid $45 million for deals app Fave, which rolled out its BNPL feature in June to its 6 million users.

Filling the financing gap

In SE Asia, most BNPL providers have marketed themselves as a tool for millennials and gen Z consumers to manage their money while being free to spend — they can sign up for the service on the spot while making purchases, and they aren’t charged interest for short-term payment plans. And in SE Asia specifically, where there is a large unbanked population, consumers get access to credit without needing to sign up with a bank first.

“Convenience is the key,” said Crystal Yu, an analyst at Momentum Works. “BNPL is purely online and it has an easier credit scoring system [than traditional instalments].”

To merchants, BNPL sells itself as a way for these businesses to attract new customers and increase checkout volumes and frequency while charging them a fee of 4% to 6% of the transaction.

The payment method is especially useful in places with low credit card penetration like Indonesia, which has around 17 million credit cards circulating in a population of more than 270 million.

“It’s also very difficult to get credit cards in Indonesia. Some of the banks require you to actually have a deposit in your bank account to mirror your credit card limit,” Angus Mackintosh, the founder of CrossASEAN Research, said at a DealStreetAsia webinar on the BNPL sector in November, adding that the model could help micro- and small businesses as well.

BNPL adoption is expected to grow quickly. A report published by FIS and Worldpay earlier this year projected use of BNPL as a payment method, though a tiny share, will more than double from 0.6% in 2020 to 1.3% in 2024, replacing payments through credit cards, bank transfers, cash, and prepaid cards.

Over-crowded market

The BNPL boom in the region may also shake the stereotype that Asians are savers. Statistics from the Bank of International Settlement on household debt as a percentage of GDP showed that though lower than its western counterparts, SE Asian households saw their debt rise in the past 16 years.

“Buy-now-pay-later creates debt and there will be a push from regulators to make it official as a debt, so they will have to [file] report[s],” said CredoLab’s co-founder and chief executive Peter Barcak. For Singapore-based credit scoring startup CredoLab, BNPL players make up 20% of its 100-odd clients across 28 countries. Barcak expects the share to increase as regulators demand more transparency.

But is the BNPL business sustainable in the long run? A survey by Finder found that among the 38% of Singaporeans who have used a BNPL service, more than a quarter of them felt they made a mistake and were worse off.

It has also become much harder to acquire and keep merchants and shoppers, now with banks, fintech firms, card issuers, e-commerce and super apps joining the bandwagon and offering similar services that run on razor-thin margins.

A September report by UK equity research house Redburn found that the big three global players — Affirm, Klarna, and Afterpay — recorded hundreds of millions of dollars in losses since 2019, while separate research by IBISWorld said despite soaring revenue, the average profit margin for BNPL players in Australia is at -2.6%.

According to industry players and investors in SE Asia, BNPL cannot be a standalone product, unless you are as big as the global players. The only way to survive is to be part of something larger.

“[We’re] starting to see some consolidation,” said Grab’s head of GrabPay and GrabRewards Chris Yeo at the DealStreetAsia’s BNPL webinar. “There will be more players, promotions, or offers will continue to be prevalent in the market. Firms will need to think about ways to make the economics work and be more sustainable.”

Cento Ventures’ founder Dmitry Levit likened the sector to deals aggregators such as Groupon and peer-to-peer lenders in Indonesia, where there were hundreds and thousands of copycats until only a few prevailed.

“With BNPLs, my guiding light is the Visa-MasterCard duopoly that eventually formed [is] what we will see in a niche market like Southeast Asia,” Levit said, whose VC has not invested in any BNPL players.

Players would probably grow in one of two ways, he said. Either collaborate with a strategic firm like a bank, which builds credibility but also means them taking a cut of your revenue, or being a neutral player and always coming up with new products like Affirm. This method may offer the highest yield, but it “takes a lot of guts and public valuation”.

Singapore-based startup Pace, which launched only in January this year, thinks it has what it takes to be the latter.

“At the end of the day, it’s all about the data — who your consumers, merchants and potential partners are,” said Pace CEO Turochas “T” Fuad, who is the former managing director of WeWork Southeast Asia.

BNPL is a way to build up the user base for Pace’s plan to provide other types of financial services like personal loans and supply chain financing. Pace is not the only player to look beyond BNPL — FinAccel has P2P lender KrediFazz, and Advance Intelligence Group offers digital verification and credit scoring services.

In an e-mail response, Atome’s chief executive David Chen said BNPL’s extension beyond retail is a “natural progression” as more merchants “are now beginning to understand the value proposition” of better sales, traffic, and spending data.

Atome’s Chen calls the sector’s evolution “BNPL version 2.0,” where pure play companies have launched debit cards, savings accounts, investments, and personal finance management products.

James Tan, managing partner of Quest Ventures, an investor in ShopBack, said the acquisition [of hoolah] will allow the site to offer bigger-ticket items since consumers are more likely to prefer paying for them in instalments. ShopBack mostly makes money by charging merchants and marketplaces that list on its site commission, with a small sum of revenue coming from advertising. Creating a BNPL department in-house would have been difficult because of the amount of money they would have needed to finance the credit, Tan added.

ShopBack and hoolah – which has gone through a retrenchment round this year – declined to comment, saying that they are still integrating the platforms.

As for its BNPL product itself, Fuad touted Pace’s expansion into four countries in 10 months – Singapore, Malaysia, Hong Kong, and Thailand – and cooperation with major banks like UOB and OCBC. Given the similarities, a BNPL player’s success boils down to its ability to scale regionally, and its customer service, he said, adding that its service accounts for 10-25% of a merchant’s sales.

Pace, which now has “thousands” of merchants and more than 100,000 users, is looking to expand into three more countries in the next six months. Fuad declined to disclose which countries these are, but Pace’s website shows it is hiring for executives in Japan and South Korea.

Regulatory maze

Regional expansion in fintech is typically hard, and acquisitions are the more feasible exit path, according to financial consultancy Kapronasia’s Joshua Chong. “[BNPL providers] are not really in the position to offer other types of lending and become a financial institution [given] regulations and restrictions,” he said.

For example, authorities may set limits on the amount of data BNPL players can collect from users, said Momentum Works’ chief operating office Yorlin Ng. She referenced how data privacy concerns were one factor leading to Indonesia’s crackdown on P2P lenders last year. The country is in the middle of deliberating a personal data protection bill as well.

“The trend is moving towards protecting privacy. So now I think the BNPL players need to find more interesting ways to do their credit scoring. It goes back to the ecosystem [strategy]. If you’re like Grab or Shopee, you already have customers’ data, you know their behaviour, then it’s easy to give them more credit. But if you’re an independent BNPL play, good luck to you, you need to really just test the model,” Ng said.

Singapore’s Monetary Authority of Singapore chairman Tharman Shanmugaratnam said last month the financial regulator is looking at how to regulate the industry. For now, BNPL transactions make up only S$114 million of the S$92 billion in credit and debit card payments made in 2020.

BNPL players have also argued that they have adequate controls in places, such as suspending accounts of users who miss payments, late fee disclosures, and no interest fee charged to users. Atome said its default rate is less than 1%. Pace declined to disclose the figure, saying it is “extremely low.”

Momentum Works’ Yu said regulations could actually be a boost. Like in the case of Huabei and Jiebei, which made up 40% of Ant’s revenue in the first half of 2020, according to an IPO filing. Yu said they continue to be popular in China even though they must now agree to share their credit history with the country’s central bank. “Alipay already had all the information about you [so now] users all feel like they’re being protected,” she said.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.