When 25-year-old Patrick Catalan learned last Christmas that he could bring home the smartphone he has long coveted with a ‘buy now, pay later’ (BNPL) scheme, he didn’t hesitate.
Short of USD 100, Catalan applied for a short-term credit on the BNPL platform BillEase, which split the payment to three months at less than 3% interest. Four days after application, Catalan was able to purchase a mid-range Xiaomi smartphone. “If you don’t have a credit card, this payment scheme is the best option,” he said.
BillEase, which belongs to the First Digital Finance Corporation (FDFC), is one of a handful of BNPL services that have set up shop in the Philippines in the last five years, offering short term loans with interest rates ranging from 0 to 5%. Along with Hong Kong-based Oriente’s Cashalo, Manila-based Jungle, and TendoPay, the BNPL firms capitalize on the country’s credit-starved market.
The Philippine central bank estimates that only 2 out of 10 Filipino adults have bank accounts, and even less a credit card. Aside from the fact that many don’t have extra cash to save, the unbanked population often also lacks the necessary documentation and is unaware of how to set up an account—an opportunity that fintech firms are willing to grab with more suitable and accessible products.
According to WeAreSocial’s digital report, 7 out of 10 Filipinos are mobile Internet users. And with the country’s young, social media-savvy population, the fintechs are not just tapping the unbanked, but the newly-moneyed younger generations too.
Since 2019, the country already counts more e-wallet users than credit card holders. Market conditions are apt for fintech firms to process loan applications via mobile apps instead of in physical branches. This is not only cheaper, it also means that infrastructure and regulatory requirements are easier to accomplish. And that’s what most in the market have done.
When Hong Kong-based Oriente’s financing arm Cashalo entered the country in 2018, it did so with the launch of an app. While it initially marketed personal loans, the company has since shifted gears and doubled down on its BNPL products.
“Typically, target consumers in markets like the Philippines need access to finance for a specific purpose,” Oriente VP Karun Arya said. “Mostly, it is to fund their small business or purchase an item to help the livelihood of their families.”
Arya explains that the majority of Cashalo’s BNPL customers are young working women buying household items and microentrepreneurs looking to grow their businesses. It doesn’t mean the use of apps comes without risk for both lenders and consumers.
BNPL firms are using proprietary technology to assess the applicant’s capacity to pay back loans. After requesting a photo of an official ID, the apps are looking for other personal data. Once permission is granted, Cashalo will filter through the applicant’s messages to discover spending patterns. BillEase is asking for official payslips and the latest bill statements. Other factors such as an applicant’s phone model are also added to the mix that will profile the consumer.
While such scrutiny may raise eyebrows from privacy advocates, the BNPL companies say that the arduous process is necessary in a market that has no proper credit scores.
The problem with credit scores
“The Philippines don’t have a very sophisticated credit scoring system which would have given fintech startups a reliable gauge for the risk in extending credit,” said Dominique Torralba, an associate director at consulting firm EY, adding that they need to be aware of the increase in fraud risk as well as credit risk.
So far, the assessment technologies seem to be working. Cashalo says that non-performing loans have been “lower than expected,” despite the pandemic. BillEase has recently seen approval rates dropping to just 30–40%. Its platform now counts 350,000 accounts, while Cashalo recorded 6.5 million app downloads since 2018, with around half of that number having benefited of its financing services.
Both haven’t yet reached the popularity of Czech BNPL firm Home Credit, which was the first non-bank institution in the country. As early as 2013, its sales agents entered department stores and retail branches offering alternative financing services and it has processed six million loan applications since then. A mobile app was launched in 2018 to diversify acquisition channels.
A true test for the industry
But a tightening competition aside, the COVID-19 pandemic is becoming the hardest test for the industry that is facing lower consumer spending, with 27 million people already unemployed.
Cashalo says that, while there’s a growing affinity to shop online, sales of BNPL products through this channel has not grown as much. For BillEase, which was already offering short-term credits through a partnership with Lazada, the new trend means good news.
“It is a very thorough test for the business model and especially risk management capability of alternative lenders,” said First Digital Finance CEO Georg Steiger. “The ones who survive will have proven that their business is sustainable through a credit cycle, or as a senior banker once told me, when the tide goes out, you see who’s wearing pants.”
Cashalo’s parent company Oriente can’t complain about a lack in capital. It raised USD 50 million in April, and before that USD 20 million in March. “The additional funding provides us with the runway we need to hit profitability in 2021,” VP Karun Arya said.