The Downside of BNPL

Is BNPL (Buy Now Pay Later) a game changer? In terms of access to credit, probably yes. In terms of credit risk? No way!

BNPL is on rapid growth among youth and young consumers in Southeast Asia including Malaysia and Indonesia. The idea of some providers to serve the underbanked or underserved is somewhat misleading. Although economically this segment is quite large, their ability to repay is quite concerning. 

Here are some key figures from different location and areas concerning BNPL: 

  1. Late Payments: According to a survey conducted by Credit Karma in 2020, nearly 40% of US consumers who used BNPL services had missed at least one payment. Late payments can result in fees and can potentially impact a user’s credit score. In Malaysia, since May 2024, late payment charges of BNPL for Atome is currently at RM 23 and additional penalty is RM 7, a lot?

2. Debt Accumulation: A report from ASIC (Australian Securities and Investments Commission) in 2020 found that one in five consumers in Australia were missing payments. The report also found that over 20% of BNPL users had to cut back on or went without essentials such as meals, and over 15% had taken out an additional loan to make their BNPL payments.

3. Young Consumers: Younger consumers, who may be less experienced with managing credit, are particularly drawn to BNPL services. A survey by Ascent in 2021 found that nearly 45% of Gen Z and 37% of Millennials in the US had used BNPL services, compared to just 8% of Baby Boomers.

4. Understanding Terms: A survey by CompareCards in 2020 found that nearly 30% of BNPL users in the US didn’t fully understand what they were signing up for when they chose to use these services.

5. Regulation: As of 2021, BNPL services were not as heavily regulated as traditional credit products in many countries. This has raised concerns about consumer protection. For example, in the UK, a review by the Financial Conduct Authority (FCA) found that the BNPL market needed to be regulated to protect consumers.

These figures highlight some of the potential risks associated with BNPL, including late payments, debt accumulation, and a lack of understanding about the terms and conditions of these services. They also underscore the need for more consumer education and potentially more regulation in the BNPL industry.

BNPL also is known to charge exorbitantly high late fees, between 10%-35% depending on scheme and platforms. There should be a better design for access to online credit and the regulators should go hard to mischievous providers. 

Further research also found these problems are common for BNPL schemes around the world. The similarities of the customers behaviours are also glaring and require deeper understanding. Read further.

The global default rates for Buy Now Pay Later (BNPL) services have been increasing as the popularity of these services grows. Specific data on default rates can vary by region and provider, but some trends are evident:

  1. Klarna: Klarna, one of the major BNPL providers, saw its default rate double in a recent period. The company’s operating losses increased significantly, from $10 million to $111 million, primarily due to rising defaults.
  2. Affirm: Another prominent BNPL provider, Affirm, has also faced challenges with defaults. The volume of transactions and the subsequent default rates have been rising, indicating potential risks in the BNPL model as more consumers engage with these services without stringent credit checks.
  3. General Trends: According to various reports, the BNPL sector’s default rates are becoming a concern for regulators. For instance, the Financial Times reported that the volume of BNPL defaults has been increasing, prompting closer scrutiny from financial authorities in regions like the UK and Australia.

The overall rise in default rates can be attributed to the ease of access to credit without rigorous checks, leading consumers to overextend financially. This issue is compounded by the lack of visibility of BNPL debt on credit reports, allowing consumers to accumulate multiple BNPL loans unknowingly.

Regulatory bodies in several countries are now stepping in to address these challenges by considering stricter regulations for BNPL services to protect consumers and ensure responsible lending practices.

Some ideas already implemented for countries that have Industry-led Code of Practice and Regulation. Here are some examples which I think should be seriously considered by others:

  1. Disclosure and fair marketing requirements, which will support customers to make informed decisions on whether to take on BNPL products;

2. Introduction of age limits for taking up BNPL products, to prevent minors from taking on credit;

3. Introduction of credit limit to prevent overleverage;

4. Suspension of accounts following missed payments, to prevent accumulation of further;

5. Credit information sharing to facilitate a holistic view of customers’ finances; and

6. For interest charges and other fees, an option being considered is to ban interest charges and to put a cap on other fees, in order to keep the BNPL product simple and avoid the accumulation of fees and charges.

This is an example of innovation that can be harmful to customers if they are not careful. Lack of education of proper financial lliteracy may contribute to this problem however providers with great foresight should have designed a better product that is useful and meaningful for customers. 

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