In the era of the digital-first lifestyle, shopping has never been easier, thanks to e-commerce and fintech. When you see something you like on social media or in a marketplace, you can buy it and have it delivered to your door with a few taps on your smartphone. What’s more, if you’re short on cash, you can even pay for it later by using BNPL methods.
BNPL stands for “buy now, pay later.” It allows customers to commit to a purchase and make partial payments over time until the balance is settled. The concept of BNPL is not new, as it is similar to existing installment financing products. However, app-based BNPL offerings are gaining momentum among millennials and Gen Z shoppers in Southeast Asia on the back of the e-commerce boom, thanks to its convenience and practicality.
The lending gap in Indonesia is still significant, while credit card penetration is low, at around 5%. This translates into an opportunity for BNPL to fill this gap and provide personal loans for underserved customers.
“As smartphone adoption across the region increases, app-based services like BNPL make accessing financial services very straightforward. Many Indonesians are financially excluded, so BNPL offers a way for them to access credit,” Zennon Kapron, director of fintech research and consulting firm Kapronasia, told KrASIA.
Currently, nearly all e-commerce platforms in Indonesia adopt BNPL checkout methods by partnering with different fintech providers. Jakarta-headquartered Kredivo has been one of the pioneers in the BNPL fintech segment since 2016, while other major BNPL players in the country include Akulaku, Home Credit, Traveloka PayLater, and Shopee PayLater.
Boosting e-commerce transactions
BNPL carries plenty of benefits for merchants. It helps vendors increase add-to-cart conversion rates and transaction value, as well as reach potential new customers. In 2020, 55% of new e-commerce users in Indonesia chose to use BNPL options when they made purchases on e-commerce platforms, according to a survey by Kredivo and the Katadata Insights Center. The survey was based on 10 million transactions on six e-commerce platforms made between January and December 2020.
“BNPL providers are riding the e-commerce wave, which is a natural progression as credit will increase consumer purchasing power on e-commerce platforms,” said Kenneth Li, partner at MDI Ventures, a backer of several fintech companies, including Kredivo. By partnering with e-commerce platforms, BNPL providers can track users’ spending habits, which will further add insights to their credit scoring engines to evaluate potential risk when lending money or providing credit, he added.
Online platforms and fintech operators have reported steady growth in BNPL transactions over the last year. Traveloka—the first non-fintech company to offer this service in Indonesia from 2018—saw its PayLater users increase by 750% since the program’s launch.
At the same time, on Tokopedia, BNPL transactions doubled in 2020. The e-commerce platform partners with players like GoPay, Ovo, Kredivo, and Indodana for its BNPL programs. Blibli, which also works with Indodana for its BNPL service, reported 63% month-on-month growth between May and October last year. KrASIA couldn’t find data about BNPL transactions on other e-commerce platforms such as Shopee, Bukalapak, and Lazada.
As for Kredivo, its total user base has doubled in the last ten months, and its annualized revenue also doubled over the previous seven months, the firm’s VP of marketing and communications, Indina Andamari, told KrASIA. Kredivo currently partners with ten e-commerce platforms and has nearly 4 million customers. “We offer a balance limit of up to IDR 30 million (USD 2,105), which is the highest among BNPL players in the country,” said Andamari.
The other side of BNPL: Increasing consumerism, potential debt trap
The idea of purchasing a product without spending money right away is very tempting for many people. Consumers might get a false sense of security, which could lead to impulse shopping, and they might end up spending money they don’t have.
A quick search on Media Konsumen, a site that helps consumers voice their opinions, shows many complaints related to BNPL offerings. Several customers wrote open letters on the website asking for reductions in the interest rate or late fees, as they were unable to pay off their debt. Some users even described unethical debt collection practices by BNPL providers, while others reported mysterious and unauthorized transactions on their pay later accounts.
There’s also a lack of education surrounding BNPL, which could lead to over-consumption. Applying for a BNPL account is easy—on most platforms, it only takes around 24 hours to be verified, and then a user’s account is activated. BNPL doesn’t require a salary or income statement, making it much simpler than a credit card application. However, BNPL could give consumers access to credit that they can’t afford, which could lead to a debt trap that becomes more difficult to escape from with each late payment.
“Globally, there has been very little regulation around BNPL, so there is certainly a risk in the current models. It remains to be seen what the impact is on consumers who may or may not be used to this type of model and might get caught by hidden or difficult to understand fees,” said Kapron.
The biggest revenue source for BNPL providers is the transaction fees obtained from retailers or digital marketplaces. This fee tends to be higher than typical credit or debit card transactions, with processing fees ranging from 2% to 8% per transaction, compared to 1.3% to 3.5% on regular credit cars. The larger cut often comes with the promise of higher transaction values for merchants.
However, companies also earn additional revenue from penalties applied to late payments, something that customers may not be aware of. Shopee and Traveloka’s pay later options charge a late fee of 5% per month of the total bill. Meanwhile, Kredivo charges a 6%.
“Similar to credit card companies, we’re charging interest to our customers, but our rate is among the lowest in the country. We offer 0% plans for pay later in 30 days or three months installments. Our merchant fees are also low,” Kredivo’s Andamari said, without revealing the exact amount. She added that the non-performing loans ratio on the platform is currently low, at about 2.5% to 3%.
Despite some of the mentioned risks, MDI Ventures’ Li argued that BNPL benefits outweigh its threats, as the service is enabling unbanked and underbanked customers to access credit. This can help customers keep their cash flow under control and eventually improve their livelihood.
“BNPL service providers certainly need to be responsible for giving balance limits to customers. They can do that by properly training the credit scoring engine so as to not burden individuals with excessive spending,” Li said.
It looks like BNPL is here to stay. “Buy now, pay later” payments in the country are expected to grow by 72.8% annually to reach USD 1.537 billion in 2021, according to a report by PayNXT360, a business intelligence platform focusing on payments. The BNPL gross merchandise value in the country is projected to increase from USD 889.7 million in 2020 to reach USD 9.2 billion by 2028.
BNPL providers are also collaborating with banks to provide loans to more customers. In September, Traveloka partnered with Bank Negara Indonesia to launch a “virtual pay later card number,” the first in Southeast Asia. Customers can use the virtual card number to shop on numerous e-commerce platforms like Shopee, Lazada, JD.id, Bukalapak, and Tokopedia. The company also partners with state-owned lender BRI and Bank Mandiri for the Traveloka PayLater Card and the Traveloka Mandiri Card, two offerings that let users transact with any offline and online merchants supported by the Visa network.
Major banks across the country are also after a bigger slice of the market and have started developing their own pay later products to reach new customers, especially those who don’t own credit cards. However, Li expects to see more collaborations between fintech and traditional banks and other financial institutions in the near future. “The BNPL market is still in its early stages in Indonesia. As the adoption of digital payments continues to grow, BNPL will also thrive,” he said.
As the market matures, authorities are likely going to impose stricter guidelines for this segment. For instance, the Monetary Authority of Singapore is currently reviewing the appropriate regulatory approach for BNPL amid concern over consumer debt. In Indonesia, the Financial Services Authority, or OJK, dictates the rules that BNPL fintech players need to obey to operate. It is not yet known if the organ will revise the framework anytime soon.
“We expect regulators to pay more attention to the segment in the future, which will likely limit gains for BNPL providers in the long run,” Kapron said.