Buy Now, Pay Later: Here's Why Southeast Asia Could Lead the Boom
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In 1958, while the Soviet and the US space programmes raced to launch satellites into orbit, Bank of America launched a product that would have far-reaching effects on Earth. BankAmericard, which eventually became Visa, helped to pioneer the widespread use of revolving credit cards. It was advertised to Space Age consumers as, “Today’s way to pay”.
Now a new way is taking flight. Global usage of BNPL (buy now, pay later) mobile apps surged by 162 per cent from 2018-19. In the US, BNPL accounted for $24 billion in purchases last year. When the pandemic began, traditional credit card volume dropped while BNPL kept rising alongside e-commerce growth. It’s expected to be the fastest-growing form of digital purchasing in the years ahead, with transactions projected to reach nearly $350 billion worldwide by 2025.
To date, BNPL growth has been led by Western-oriented startups such as Klarna, Affirm and Afterpay—based in Sweden, the US, and Australia respectively. These firms along with a few others will collectively surpass $3 billion per year in revenue, around 20 per cent of what Mastercard made last year. However, there’s a trifecta on the horizon in Southeast Asia for BNPL. First, credit card penetration is low, which means less competition for BNPL. Second, credit rating bureaus required by banks for credit cards are a decade away in most ASEAN countries. And finally, the debt-adverse Asian culture is warmly embracing ‘zero-interest’ installments that feel ‘same as cash’.
That’s why our Southeast Asian venture capital firm is keeping an eye on BNPL newcomers in the 10-country ASEAN region. In developing nations from Indonesia to Vietnam to Malaysia, along with tiny but highly developed Singapore, we see markets that present challenges, but also strong receptivity to the benefits of the BNPL model.
The value proposition, the ASEAN ascent
For consumers who want or need to avoid running up credit card debt, BNPL offers a modern twist on an old concept: the installment plan. Suppose you are a millennial (the prime prospect group) looking to furnish a new apartment. On the Web you find a nice sofa but it’s a few hundred dollars, a stretch at your salary. Ideally you’d also like a coffee table, which would add even more. Next to the ‘add to cart’ button is an option to spread the payments over several months, at zero interest. And you could qualify for this credit quickly: “Get a real-time decision with just 5 pieces of info,” says one BNPL firm’s pitch. So you buy the sofa and put the table in the cart, too.
This typical scenario shows why BNPL companies can charge ‘higher’ transaction fees to merchants than credit card companies do. BNPL encourages sales that wouldn’t happen otherwise, raising click-through conversion rates. Better yet, it drives up AOV, the average order volume. Meanwhile, new customers now have the app, which will show them periodic promos for the merchant’s goods, increasing repeat business as well.
Customers with BNPL accounts may of course be tempted to overspend. They may incur late fees or get into interest-bearing loans, just as with credit cards. But the offer of an easy, interest-free entry point, combined with apps that give one-touch transparency of account status, is enough to keep new users coming. This is especially true in Southeast Asia, where credit cards are shunned culturally while no-interest installments feel like a smart way to spend. ASEAN credit card penetration is low, ranging from a few per cent to 20-30 per cent across most countries versus 60-80 per cent in the West. By contrast, in Indonesia—the region’s largest country, with a population of 275 million—BNPL companies Kredivo and Akulaku both already have over 10 million installs of their apps on Google Play. Hoolah, founded and based in Singapore, grew its transaction volume by 1,500 per cent during 2020.
The rapid growth has been fueled, in part, by a fundamental way in which BNPL firms differ from credit card companies. A credit card serves as a link between bank accounts. Your Visa or Mastercard, for instance, channels money from a bank that actually issues you credit, into the accounts of the merchants you buy from. A freestanding BNPL is a network linker and banker rolled into one. Hoolah extends credit to the buyer and pays the seller directly. This makes it easier to onboard new merchants, without the hassles of traditional banking arrangements, and can lead to operating efficiencies as well.
An obvious downside is that the BNPL bears more risk. In an economic downturn, Visa Inc. may lose revenue but doesn’t have to worry about defaults; the issuing banks are stuck with those. When you launch a BNPL, you are the potential stuckee from day one. And, as in all fields of entrepreneurship, you can succeed by turning challenges into opportunities.
How ASEAN BNPLs shine
Perhaps the trickiest challenge is screening people who apply for credit. It has to be done fast. There are sweet spots to hit, as you want to include users who might not qualify for credit cards but are good risks nonetheless. Further, in a relatively greenfield market such as Southeast Asia, conventional screening gets tough. As noted, most countries don’t have credit bureaus generating US-style FICO scores. Many people have scant credit profiles anyway; many are unbanked or only recently banked.
On the plus side, usage of digital wallets is high. Two big ones—GrabPay and GoPay—have huge and growing user bases throughout ASEAN, since they were spawned by companies that provide popular ride-hailing and delivery services: Grab, based in Singapore, and Jakarta-based Gojek. Wallets like these can be mined for richly detailed spending histories.
Considering all factors, I see BNPL taking off explosively in Southeast Asia over the next five to 10 years. Key players are developing algorithms and datasets for risk assessment that will grow more valuable over time. To deal proactively with risk once users are on board, they are innovating in areas such as customer engagement and the tweaking of payment schedules.
They’re also learning to work profitably with smaller transactions than Western BNPLs often handle. (US-based Affirm, for example, does a big chunk of its business financing the purchase of $2,000-and-up Peloton exercise bikes. In ASEAN markets where spending power is lower but growing, average basket sizes are under $200. The most common items bought are clothing and personal accessories.)
Moreover, in head-to-head competition, we see the region’s BNPLs acquiring customers that traditional banks and global credit-card companies would like to tap but so far cannot. On the list of up-and-coming companies to watch we’d include Hoolah, Pace, and Atome, as well as Paidy in Japan. Now here’s one final point. While these companies are primed to grow on the strength of their home and neighboring markets, cyberspace has no boundaries. Top ASEAN firms work in both English and regional languages. The new consumer credit question is not “What’s in your wallet?”; it’s “What’s on your phone?” Don’t be surprised if the answer someday is a Southeast Asian BNPL app.