You see it, you see it, you want it, you buy it.
But can you really afford it?
Would you like a Secretlab chair for 600 CHF but cannot pay for it in full? How about a used Cartier watch worth S $ 2,500 on sale at Reebonz?
Well, with the Buy Now Pay Later (BNPL) payment services, you can now pay for these tempting “wishes” in installments.
Other purchases that can be made in installments with BNPL – paying your security deposit for the wedding banquet as well as the diamond proposal ring and those omnidesks.
In fact, as of October last year, around two in five Singapore residents (or 1.1 million Singaporeans) had used some type of BNPL solution, according to a consumer survey by Finder.
The BNPL services should continue to grow. Juniper Research predicts the BNPL industry will grow 274 percent to $ 995 billion from 2021 to 2026.
BNPL purchases would account for 24 percent of global e-commerce transactions (for physical goods worth) and account for at least 1.5 billion purchases in 2026, compared to 340 million and just nine percent in 2021.
BNPL purchases are expected to account for 24% of global e-commerce transactions by 2026 / Image source: PYMNTS
What is BNPL?
The surge in BNPL services came in the wake of the COVID-19 pandemic and attracted insolvent consumers with its flexible payment plans.
A typical payment service would break a purchase into three interest-free monthly payments, and providers typically require a credit or debit card number to debit payments when due. Payments are often touted as interest-free, but some observers note that many are unaware of late payment fees.
Popular BNPL service providers in Singapore are Hoolah, Atome, Rely, Pace, Grab PayLater and FavePay Later.
The Singapore BNPL market is projected to grow 14.8 percent through 2028, as online shoppers can purchase products instantly without having to pay the full upfront cost. Most BNPL services are offered at zero percent interest.
Millennials are typically the ones who use this payment scheme / Photo credit: Research and Markets
However, observers fear that with many micro-vendors coming on board, users can accumulate significant debt as they switch from one vendor to another, leading to multiple accounts with bad debts. Many BNPL firms rely on their internal metrics to check users' creditworthiness and don't do credit checks with other industry vendors.
The "instant lifestyle"
The obsession with material things doesn't just stop in sunny Singapore. It's happening around the world – especially for the younger generation like Millennials and the Gen Zs.
According to Professor Oliver Rui, a professor of finance at China Europe International Business School, the younger generation is more anxious to experience "instant gratification" rather than long-term financial planning.
Millennials are between 26 and 41 years old, while Gen Zs are between 6 and 24 years old.
BNPL payment options are not for those who lack financial discipline / Image source: Hoolah
In the “material world” of China, for example, the country's millennials are using BNPL options to satisfy their hunger for the latest consumer devices and other services, and that is worrying regulators.
During last year's Singles ’Day shopping festival, the world's largest online shopping event achieved a record $ 18 billion in sales, with every third transaction made with Huabei's deferred payment option.
Other loan services from Alibaba and JD.com allow teens to spend borrowed money. With new lines of credit to young people who may not be very good at handling money, many went bankrupt and had to save their parents.
"This is a cause for concern, especially among millennials who lack the financial discipline to curb unnecessary and excessive spending," said Vasu Menon, executive director of investment strategy, OCBC Bank.
“(BNPL) offers buyers the ability to pay for their purchases in interest-free installments over time … However, those who make such purchases, especially expensive items, may not realize that while installments can reduce the cash flow burden by Allowing payments over time can affect your saving ability and prevent you from reaching more important long-term financial goals like buying a home, "he said.
Observers say some traders are raising prices for goods that offer BNPL agreements / Image source: Atoms
Suraya Zainudin, founder of RinggitOhRinggit.com, a personal finance blog, firmly believes that BNPL agreements are more harmful to consumers than anything else.
She said BNPL providers are creating a debt trap for consumers who overwhelm themselves without fully understanding the impact these products will have on their future financial health and creditworthiness.
Other other issues that personal finance watchmen are also raising red flags: rules on credit limits and surcharges, as there have been instances where merchants would price their products 10-25 percent higher if BNPL agreements were offered.
BNPL's zero interest service is another important area of concern, warned observers, who pointed to the risk of hidden late payment fees that could lead to bad debts and called for more transparency on fees.
BNPL providers urge users to "pay on time"
In response to inquiries from Vulcan Post, a Grab spokesman said the PayLater service has no hidden charges or interest charges associated with using the service. "All potential costs, such as account reactivation fees, are clearly outlined in our communications materials to consumers," she said.
Grab PayLater only offers it to consumers who have the option to pay. “To find out who is who, we created a risk model based on various factors such as spending and payment behavior in the Grab app. Based on this spending and payment behavior, we also set personalized spending limits for different consumers. "
So far, an overwhelming majority of consumers have paid on time. “If users miss a payment, their PayLater is blocked to prevent a spiral of debt (in contrast to a credit card). Your account can be reactivated when you make a payment as well as paying a one-time reactivation fee of S $ 10, "the spokesman said.
Fave's website states that customers' eligibility for FavePay Later is assessed based on several criteria, including the validity of the credit or debit card associated with the user's Fave account and the user's transaction history on the E. -Commerce platform. Customers would pay a late fee of 1.5 percent of the final price if they fail to meet an installment before the due date.
Atome freezes customer accounts if a customer is in default with payment / Photo credit: Atome
Trasy Lou-Walsh, Atome's general manager for Singapore and Malaysia, said the company pays merchants the full amount (excluding transaction fees) when users make purchases, and essentially Atome is the one who takes the risk when a customer not repaid.
If a customer defaults on payment, the account will be immediately suspended until payment is cleared or a fixed fee of S $ 20 is paid to reactivate the account. Around 70 percent of users are between 26 and 45 years old.
BNPL providers have an incentive to let customers pay on time, Trasy said, and when customers default on payments it hurts business.
“Our business model works by charging merchants a transaction fee for every purchase. It doesn't cost anything extra for customers: zero interest, zero annual fees, zero service fee … the business depends on the ability to assess this credit risk in real time because if you don't do it right, your business will not grow sustainably or healthily over the long term . "
Trasy said the company conducted an extensive six-month research into consumer habits prior to launching Atome, and the research found that people wanted a financial tool to better manage their expenses and shop smarter while staying on a budget. This paints a different picture than the opinion of the experts.
“Up to half of our customers choose to register their accounts with a debit card, not because they can't qualify for a credit card, but because they choose not to use one. This is a great finding on how millennials are very aware of how they are spending, ”she said.
Atome said the repayment terms are transparent and, in most cases, are automatic when a user links a credit or debit card to their account.
Most of the vendors Vulcan Post spoke to said they have transparent refund policy / Photo credit: Vulcan Post
“Users can also easily track their payment plans, when and how much they have to pay, in the mobile app. We send multiple reminders via SMS, email and notifications through mobile apps to remind users that payment is due, ”said Trasy.
Grab also noted that it is important for all users to have a good understanding of any financial product (not just BNPL) before using it.
"You should beware of hidden information and costs and have considered all factors before committing to a service," said the company spokesman.
Governments are considering stricter regulations
Singapore's central bank is considering regulating the leeway, especially given the rising indebtedness of the younger generations.
It said it is reviewing "the appropriate regulatory approach" for the BNPL solutions being offered and the steps to review these solutions will be "applied proportionately to the risk and evenly across all providers."
It found that if consumers are not careful and spend too much money, such systems can still overwhelm finances and create potential financial distress.
The Monetary Authority of Singapore is not alone in this. The UK's Financial Conduct Authority (FCA) has stated that the BNPL solutions it offers are subject to stricter rules as billions of pounds have been lent out in unregulated transactions.
The Australian Securities and Investments Commission (ASIC) had also raised concerns about the BNPL solutions. That was after it was reported that one in five consumers missed payments and was in financial need. ASIC said consumers are getting by on bare minimums or have taken out extra credit to cope with BNPL payments.
MAS examines the regulation of the BNPL industry / Image source: Financial Times
Industry observers agree that regulation is needed to both protect customers and create a healthy and sustainable BNPL industry in which operators have a long-term presence.
The introduction of rules and requirements would help to filter out the less reliable players.
By and large, regulating BNPL systems will help manage the finances of the younger generation in the long run, Vasu said.
He cited the OCBC Financial Wellness Index poll conducted last year, which showed that when compared to Gen X and baby boomers, more millennials are paying the minimum amount on their credit cards, reflecting a worrying trend in this generation's consumer habits.
"BNPL programs run the risk of spurring overspend and becoming a debt trap that is a significant deterrent for millennials from achieving their life goals, paying for their children's education and building a nest egg for retirement," said Vasu.
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Highlighted Image Source: South China Morning Post