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Exus Blog Article

The BNPL loan problem in Southeast Asia

4 minute read


Given the severity of recent world events and the sheer convenience of the practice, buy now, pay later (BNPL) is becoming an increasingly popular option across Southeast Asia. Fuelled in large part by Gen Z and millennial customers, the BNPL system is attractive to consumers for several reasons.

On the surface, BNPL is a win-win solution for the customer and the lender but there are obvious risks for lenders and borrowers alike. After all, it can be tempting, when the payment seems so far in the future, to spend money you don’t have right now, but there is no guarantee you will have it in the future either. What will this mean for collections teams as BNPL continues to rise in SE Asia?


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The global BNPL market

BNPL is by no means a localised anomaly. Indeed, we’ve already explored how it’s proven so problematic for lenders in the UK and so popular with borrowers. In Southeast Asia, where only 27% of the 670 million residents actually have bank accounts, it’s an even more enticing prospect.

At its core, BNPL is a short-term financing option that allows customers to make a purchase today that they will pay for at a later date, most often in monthly installments. Initially, this was an option only ever reserved for big-ticket items like cars and furniture but in recent years it’s become commonplace at all online checkouts.

Not only does it provide a more manageable payment option for individuals whose finances might have been reshaped by the pandemic but it’s available to unbanked customers too. Once you also factor in the flexibility, ease of use, and low interest (often 0%, in fact) it becomes pretty clear why the BNPL market is expected to be worth $33.6 billion by 2027.


The rise of BNPL in SE Asia

The pandemic has taught consumers to be more careful with their finances and fintech companies understand this better than anyone. This is why they have made such a strong play in the region for the roughly 438 million unbanked individuals.

This is not a region that’s shied away from digital transformation either, with Asia-Pacific forecast to be the fastest-growing region in the world when it comes to internet adoption. In fact, 40 million consumers took their first tentative steps online in 2020 alone.

So, while there are 438 million unbanked customers, there are 400 million internet users. This represented a bold opportunity for fintech players and they certainly didn’t sleep on it. There are dozens of fintech companies in the region now offering BNPL services with Grab comfortably the biggest fish in the lake.


Major players in SE Asian BNPL

The Malaysian company Grab has become as ubiquitous in Southeast Asia over the last five years as Uber has become in the western world. Grab functions not only as a BNPL solution but as a complete digital ecosystem providing everything from ride shares to takeaway food.

This year, the company’s reach stretched even further when a partnership was struck with online payment platform Adyen to allow BNPL facilities to be installed in “frictionless checkout experiences” across Malaysia and Singapore.

But Grab is far from the only player in town. Its largest competitor in the region, Gojek, is just as popular in Indonesia while the Singapore-based Hoolah boasted a 280% increase in partnered retail stores between 2019 and 2020. Also based in Singapore, Atome reported a 30% increase in conversions over the course of the pandemic.

Perhaps the most surprising big player in the Singaporean market, however, is the gaming brand Razer, which announced a partnership with payment provider Rely late last year. In the Philippines, meanwhile, there is the Cashalo platform from Oriente that experienced a 20% sales growth in 2020. And in Vietnam, there’s the ambitious Reepay, which hopes to take advantage of the forecasted $4.33 billion Vietnamese BNPL economy.

There are dozens of options and the latest company to join the fray is none other than Mastercard. They partnered with Pine Labs recently to roll out a 0% interest BNPL solution across the entire region. With such a respected name getting in on the action, it would appear that BNPL is here to stay in Southeast Asia. But is that necessarily a good thing? Perhaps not for debt collections teams.


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The impact on debt collections

BNPL doesn’t seem like a loan, at least on the surface. For one thing, it’s generally 0% interest and can feel like a risk-free option. But it can be a dangerous path to debt. That instant gratification that comes with the initial purchase can be quite powerful and an average payment period of between 3 and 12 months is manageable for most customers. But when those purchases start adding up, debt begins to rear its ugly head.

The problem is that the initial barrier to entry for a BNPL payment is incredibly low. This means customers could pile up purchases without even realising it and there’s nothing stopping them from doing so. In Australia, a survey recently revealed that 21% of BNPL users failed to make payments on time last year, representing $33 million in fees and some debtors being forced to take out additional loans to cover their costs.

A major problem is that BNPL debt is generally not visible on credit files, which means lenders could underestimate the levels of debt a customer is in. BNPL is also an industry that relies heavily on data and in many emerging economies across SE Asia, data is either scarce or unreliable.

BNPL was always going to be an attractive option in SE Asia too, given that credit cards are shunned culturally. Indeed, credit card penetration in the region is shockingly low, ranging from just a few percent to 20-30% across most countries versus 60-80% in the West. In stark contrast, 10 million BNPL apps from the company Kredivo have been installed on Indonesian smartphones in the last year and Hoolah grew its transaction volume by 1500% during the pandemic.

The obvious solution here is to regulate BNPL to place hard limits on spending. But it’s still a relatively new industry that has yet to fully form an identity so regulation is realistically some way off.

Some are already finding ways around the problem. The aforementioned Hoolah, for example, has implemented a risk detection system that is engaged as soon as a customer has overspent. Once this limit is hit, the customer must repay all their debts before they are allowed to use the service again.

As ever, it’s the technology and how it’s utilised that’s going to make the real difference here, and as the BNPL market in Asia continues to grow into the billions, lenders will need to start investing in the right solutions to ensure BNPL debts are not allowed to mount. This means credit screening must become mandatory and all lenders must make the most of their data. Otherwise, a sea of short-term debts could end up washing ashore in the not-too-distant future.


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Written by: Marios Siappas

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