Challenges facing BNPL players

BNPL has replaced credit cards as a popular payment method in the epidemic era. Using the feature of "enjoy first, pay later", BNPL has successfully won a large number of fans. Today, BNPL is indeed the hottest fintech student.

However, what crises are hidden under the seemingly convenient and easy-to-use package of BNPL? Is it starting to send out alarms? Is BNPL sugar-coated in poison? Or is it a financial revolution across the ages?

What is Pay After Purchase?

Buy Now Pay Later (Buy Now Pay Later) is a payment method that allows you to pay in installments and pay later without a credit card. As early as 2009, the Bill me later company acquired by eBay was actually BNPL, but it did not attract the attention of the international market at that time, but until the emergence of Klarna, a Swedish financial start-up company, after the introduction of BNPL into e-commerce payment, the first The concept of pay after purchase is officially on the rise.

business model

The income of BNPL operators is mainly to collect handling fees from merchants, as well as interest on instalment payments by consumers, late payment fees for overdue payments, etc. For each transaction paid by a BNPL operator, the merchant can charge a handling fee ranging from 3% to 5%, and the interest rate of consumer installment payment is mostly 3%.

How big is the buy now pay later market?
According to the report of American debt company LendingTree, BNPL has become a mainstream payment method, and 4 out of 10 Americans have used BNPL payment services. According to GlobalData data, BNPL players have created the fastest-growing segment market in consumer finance, with transaction volume expanding from US$33 billion in 2019 to US$120 billion in 2021, showing the size of the BNPL market and the fact that it cannot be underestimated. of growth.

Buy now, pay later transactions will account for $2 of every $100 spent on e-commerce in mid-2021 as the number of e-commerce has soared during the COVID-19 pandemic. According to Worldpay's 2022 Global Payments Report, consumers are increasingly turning to e-wallets and buy now pay later platforms as an alternative to cash and credit cards. The report predicts that the proportion of BNPL in global e-commerce payments will double from 2.9% in 2021 to 5.3% in 2025, which means that the buy-before-pay market still has great potential.

What are the risks of BNPL?

1. Loose censorship: According to the credit reporting agency TransUnion, from the fourth quarter of 2019 to 2021, about 43% of users who use BNPL or loans when shopping are consumers with poor credit, and this group accounts for more than 15% of the population. There is a lack of a traditional credit review system. In addition, in order to stimulate the number of users, the review process is also relatively loose.

2. High credit risk due to user groups: BNPL operators in the United States especially target the young generation Z (those born between 1995 and 2000) who do not have credit cards and have insufficient credit lines. Data shows that young generation Z young people are indeed particularly easy to delay payment. According to surveys by various institutions, 43% of the generation Z group are delayed in payment for at least one period, and even as high as 30% will be delayed for at least two periods.

3. The overdue repayment specification is unclear: Different BNPL companies have different terms for overdue payment, some will refuse to lend to users, and some will charge additional fees. superimposed debt.

4. Excessive consumption: Through BNPL payment, consumers can avoid paying the full amount at one time, which invisibly reduces the psychological burden of consumers, and overestimates their own consumption affordability, which is easy to fall into the cycle of first enjoyment and then pain. According to LendingTree's report, nearly 70% of US users admit that the use of BNPL has contributed to excessive consumption.

5. The credit score is not transparent: other BNPL operators or financial institutions have no way to fully understand the financial situation of consumers, and may miscalculate the credit limit that customers can afford. Therefore, starting from 2022, BNPL operators will continue to report consumers’ usage status. to credit reporting agencies including Equifax, Experian and TransUnion.

What kind of warning signal does BNPL issue?

According to a survey released by U.S. debt firm LendingTree in April 2022, 42% of the 1,500 BNPL users surveyed had had overdue payment issues. A survey by US financial website DebtHammer also pointed out that 30% of users have difficulty paying "buy now, pay later", and 32% of users say they skip paying rent, utilities or child support in favor of paying "buy now, pay later" bills . Therefore, in this current tense economic environment, users are under great payment pressure.

In fact, the booming trading volume has not translated into higher profits, and now BNPL operators are facing more severe financial losses and debt problems. According to the Afterpay report, it will lose $160 million in 2021, much higher than the $23 million in 2020; in the second half of 2021, Afterpay's bad debts increased by a total of 70%, and overdue charges also surged. In addition, the Zip report pointed out that the loss in 2021 will rise to 660 million US dollars, an increase of about 30 times compared with 20 million in 2020; the bad debt rate of Zip in the second half of 2021, compared with the same period last year, also increased by 2 times.

Australia's BNPL businesses had gross bad debts of $220 million on sales of $11.4 billion in 2021, while the charge card industry had bad debts of $15.4 million on sales of $56.8 billion. It can be seen from this that BNPL's total bad debt is much higher than that of charge cards when its sales are much lower than that of charge cards, which once again shows the danger of BNPL's industry.

State regulation

1. United States: The U.S. regulatory agency CFPB launched an investigation in 2022 and decided to require five major BNPL operators, including Affirm, Klarna, Afterpay, PayPal, and Zip, to provide trading frequency, transaction fees, guarantee tools and For information such as credit reports, the CFPB's concerns are mainly focused on consumer protection, such as whether consumers clearly understand the payment schedule and delay fees.

2. UK: The UK Financial Supervisory Authority (FCA) announced in 2021 that it will supervise the consumption of BNPL. The government will require operators to conduct appropriate credit checks before signing sales contracts with consumers, and ensure that consumers are in the relevant regulations. continue to benefit from this payment method. Britain's Advertising Standards Authority banned several of Klarna's ads for "irresponsibly encouraging consumers to use borrowing to change their mood", and issued regulations requiring it to make it clear that BNPL is a debt.

3. Australia: Published the "Buy Now, Pay Later Supplier Code of Conduct", requiring operators to strengthen monitoring of the solvency of existing customers. In addition, lenders are prohibited from putting extra pressure on people in financial difficulty.

4. European Union: The Secretary-General of the Swedish Consumer Association, the European Union Consumer Rights Organization, and the Austrian Consumer Organization questioned that BNPL does not conform to the principles of consumer ethics, so the European Commission will require relevant businesses to adopt consumer credit checks in 2021.

Although countries are aware of the crisis that BNPL may cause, they all hope that BNPL operators in various countries can be more cautious in credit review. Although there is still no actual strict review system, it can still be seen that governments of various countries attach great importance to the potential dangers of BNPL. In the future, the situation in various countries will definitely be regulated by legislation successively, and business planning will be included in the compliance review, so as to reduce the possibility of user debt whirlpools.

The challenge of a new generation of competitors

Tech giants have come to seize the business opportunities of BNPL. In 2022, Apple will launch a new function, Apple Pay Later, which allows consumers to pay the bill in 4 installments within 6 weeks. The first payment must be paid at the moment of purchase, and then the payment will be made every 2 weeks. No interest or late fees will be charged, and you can see the consumption and repayment status in Apple Wallet.

After Apple Pay Later matures, it has the following competitive advantages:

1. Huge Apple ecosystem: The iPhone itself has high brand loyalty and has a large reach, so Apple Pay Later has an inherent advantage.

2. No need to install additional equipment: About 65% of merchants in the United States can use Apple Pay, and merchants can directly let customers use Apple Pay Later service without installing additional hardware and software equipment.

Various technology companies and digital banks are advancing towards BNPL one after another. Through their original user base, their BNPL services can spread more quickly. In addition, BNPL is a product of a low-interest environment. Today, in the face of rising interest rates, it has not only pushed up the financing costs of BNPL companies, but also compressed their profit margins. Therefore, the existing BNPL operators are in a weak position relative to the new competitors, and under the multiple blows, the survival of the BNPL operators appears to be more precarious.

Mark's thoughts

Looking back at Taiwan's development from the development trend of foreign BNPL, most of Taiwan's BNPL are currently not operated by banking institutions, so the supervision is more inclined to consumer credit rather than payment tools, and the Financial Regulatory Commission also prefers this approach. However, the Financial Supervisory Commission did notice the over-consumption problem caused by BNPL, which may make users unknowingly carry unrepayable debts, but it has not actually implemented any control measures for the industry.

As more and more BNPL operators enter the Taiwan market, will the fierce competition allow operators to relax their censorship and quotas to acquire more users, which will lead to an increase in the risk of the overall industry. Although banking institutions do not operate this business, they are also exposed to such risks. BNPL operators will claim that the risk of small consumer credit is not high, but when the bank cannot know the arrears of customers' BNPL transactions, it is easy to overestimate the credit limit that customers can afford.

Of course, the best way is to allow private credit providers to share credit information. Although the Financial Supervisory Commission has opened up P2P providers to easily obtain personal credit information, it is not quite mature from the perspective of the whole approach, so if the financial management will follow up Will be willing to revise regulations, so that information sharing, protection and processes have certain norms, in order to reduce the overall risk.