Buy now, pay later – and “forever”?

As financial services evolve, so must our mindsets.

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Published by AstroAwani, image by AstroAwani,

Credit providers for BNPL is proliferating in Malaysia – due to demand for easy access to cash for consumer products (coupled with flexible terms and conditions underlying the use of such financing options).

Among these are PayLater (Grab), FavePay Later, Hoolah, myIOU, Klarna, Affirm, Atome, etc., whereas SPayLater is offered by Shopee as the retailer which resembles a classic HP arrangement.

Hence, whilst loans and credit cards are products offered and managed by commercial banks, BNPL options are offered by non-banking financial institutions that provide customers the option to stretch out and separate their payments into 3-4 equal amounts (with myIOU allowing up to a maximum of 6 months), often with no upfront (administrative) fees and 0% interest (except SPayLater which charges 1.5% a month).

In fact, some don’t even charge late or penalty fees. For example, according to the CEO of Split and co-founder Dylan Tan, ““[o]ur revenue model hasn’t changed from the start. 100% of our revenue comes from merchant success fees, which is a percentage commission that merchants pay us on all the sales that we process” (“How do BNPL companies make money? We got 3 of them to answer”, Vulcan Post, September 7, 2022).

Although BNPL companies which mainly profit off the fees they charge retailers normally don’t disclose the figures as such, merchant fees can be as high as 8% of a customer purchase amount (“What Is Buy Now, Pay Later (BNPL)? How BNPL Works”, Shopify, November 4, 2022).

Despite the above-average processing fees (as compared to e.g., credit card processing fees of merchants as charged by banks), businesses still opt to leverage on BNPL services because it’s an effective method of increasing sales – not least based on consistent usage by consumers.

According to the “Malaysia Buy Now Pay Later Business Report 2022” (as reported by BusinessWire, December 12, 2022), (domestic) BNPL payments are expected to grow by 78.7% on an annual basis to reach USD1.12 billion in 2022. BNPL payment adoption is expected to grow steadily over the forecast period, recording a CAGR (compound annual growth rate) of 35.4% during 2022-2028. And its gross merchandise value is set to grow from USD625.3 million in 2021 to reach a staggering USD69 billion by 2028.

The growth of BNPL shows that using monetary policy to manipulate the policy/official interest rate setting to dampen demand is ineffective. In this case, indirect/secondary credit creation circumvents the transmission mechanism originating from the overnight policy rate (OPR) since the credit isn’t created in this instance but pre-existing (as cash) and merely transferred to the merchant.

Increasing interest rate doesn’t necessarily reduce demand but only serves to reduce purchasing power. This forces people into more debt as they need to hold on to more cash to make up for lesser purchasing power.

Hence, the need to stretch their purchasing power by way of instalments, among other ways.

So, the better way for monetary policy is still credit regulation (“Gopinjam – will it lead to subprime leading?”, EMIR Research, April 15, 2022) – rather than an “accommodative” (hangover of the gold standard exchange era) monetary policy.

Unlike credit cards, BNPL doesn’t affect one’s credit score and isn’t centrally-regulated.

Hence, consumers may practise “loan-stacking” where they take up multiple loans from different sources.

As it is, being a nascent sub-industry set against the regulatory milieu of the yet to be implemented Consumer Credit Act (CCA), there’s currently very little regulatory oversight of BNPL service providers.

This raises the concern of BNPL companies “leveraging off” on consumers’ “present bias” – the tendency for individuals to be overly impatient in the short-run relative to their long-run preferences as part of the inter-temporal decision-making behaviour – to encourage overspending and make excessive purchases.

For example, in a survey conducted by C+R Research in the US, more than half (57%) of BNPL users say they have later on regretted making a purchase because the item was too expensive (“Buy Now, Pay Later Statistics and User Habits”, C+R Research, 2022).

The psychology behind the instantaneous allurement of BNPL is that it creates a disconnect between the pleasure of the purchase right now and the pain (regret/discomfort) of the payment later.

In an experiment on the dynamics of debt (in general), it’s found that people tend to over-attach “weightage” to the final payments and ignore the duration of loan sequences, thus choosing debt plans where they end up paying more rather than less. Additionally, consumers strongly focus on the monthly payment, often to the exclusion of other costs (“The Hedonics of Debt”, Frontiers in Psychology, November 17, 2020).

The implication of this would be that certain financial products disproportionately hurt consumers with behavioural proclivities.

When it comes to finances, we can often act in irrational ways.

The future of financial regulation will need to work hand in hand with behavioural research to stay relevant.

BNPL use has resulted in a permanent rise in overall expenditure of around USD60 per week, straining the average household retail budget by 30% in the US. Though this study is based on the American demographics, it’d not be surprising if BNPL has had a similar rippling effect on Malaysian BNPL users.

Another study discovered that, on paper, BNPL borrowers appear to be as creditworthy as their conventional-banking counterparts, but are significantly more likely to default after the credit is made. BNPL delinquent rates are exceeding credit card delinquency rates, and businesses’ values have been reduced as investor interest waned (“The Buy Now Pay Later Bubble is About to Burst”, The Atlantic, January 11, 2023).

Furthermore, BNPL providers also typically don’t provide third party or alternative dispute resolution (ADR) mechanisms for filing of complaints/grievances.

In light of the rise of the BNPL sector in Malaysia, the CCA which is targeted to make its appearance this year is poised to be implemented under the oversight and jurisdiction of the Consumer Credit Oversight Board (CCOB) as the authority overseeing the non-banking consumer credit market (which includes businesses as well).

Meanwhile, existing ministries and agencies, i.e., Bank Negara, Securities Commission (SC), etc. will continue to regulate their respective sectors. Besides serving as a regulatory body for credit service providers, the CCOB should also aim to integrate a behavioural approach to financial regulation.

Empirical evidence suggests that behavioural research can help improve policy-making process (inputs and feedback) and contribute to the formulation and implementation of more effective regulation on consumer credit practices and habits, which enhances the performance of markets and improves individual outcomes (“Implications of Behavioral Research for the Use and Regulation of Consumer Credit Products”, Elliehausen G., SSRN Electronic Journal, 2010).

A practical example would be that of the CCOB issuing guidelines and regulations on how BNPL companies need to report data to the central bank as part of the wider effort to promote and enhance “effective surveillance, supervision and enforcement framework to deter and reprimand unfair, unethical and predatory practices” (“InTheKnow: What is the Consumer Credit Act?”, The Edge Markets, November 07, 2022).

The goal is effective behavioural influence.

Ideally, the future of financial credit regulation should constrain the exploitation of behavioural biases.

The CCOB will also need to have a forward-looking approach as credit providers evolve with technology.

It’s about time Malaysia updates its Personal Data Protection Act (PDPA) 2010 to model after the General Data Protection Regulation (GDPR) of the EU.

At present, PDPA only governs data protection for commercial transactions but doesn’t ensure/or make it compulsory that a business’ Data Protection Officers (DPO) are registered with a supervising authority or has no conflicts of interests (“Malaysia’s PDPA vs the GDPR”, TermsFeed, July 01, 2022).

Particularly in e-commerce, data protection intersects also with safeguarding consumer finances. e-Commerce websites hold valuable information such as credit information, addresses, and other personal details. This opens up a wealth of opportunities for identity theft and fraud.

Besides malicious third parties, consumers must also be assured against unethical usage of personal data such as bulk data protection breaches for the purpose of selling to a third party which in turn might be employed for marketing purposes or even scamming.

According to a local survey, 59% of Malaysian respondents have no idea what a credit score is, and 32% are unaware of the benefits of having a good score (“Malaysians on the Edge of Disaster Financially”, Free Malaysia Today, December 6, 2022). Additionally, only 55% of credit card holders pay their sum in full every month.

The remaining either pay the minimum amount (18%) or whatever amount they are able to afford at that time (27%).

Needless to say, the level of financial literacy amongst Malaysians is dire.

BNPL is currently most popular amongst the Gen Z, who are just entering the workforce (“Nearly half of Gen Z millennials to rely on buy now, pay later this holiday: report”, Retail Dive, October 12, 2022). This generation feels the pressure to keep up with appearance and status. Controlling their expenses, such as putting a limit on eating out, shopping and travel makes them feel that they’re unable to enjoy the fruits of their labour (“Malaysian youths generally unable to manage finance well, SC’s survey finds”, The Edge Markets, June 30, 2022).

It’s also found that more than 290,000 consumers have been declared bankrupt, with more than 70% of them below the age of 45 (“Promote Financial Literacy at All Levels”, The Sun Daily, October 22, 2022). Youths are undoubtedly one of the most important age segments in need of greater financial literacy to prevent future insolvency and over-indebtedness.

The Internet isn’t short of any educational, accessible, and well-crafted articles and videos on personal finance. However, it’s time that financial literacy initiatives also take on a more top-down approach to empower grassroots community engagements as well.

The establishment of the Financial Education Network (FEN) under Bank Negara and SC has been a step into the right direction – to form an alliance for information repository amongst multiple stakeholder groups. Perhaps it’s also time for the Ministry of Education (MOE) to officially integrate financial literacy not only into the school syllabus, but also the co-curricular activity (CCA) framework.

Working together with FEN, a structured financial literacy programme could be progressively introduced into schools, starting with the training of teachers to educate on the subject matter. Working alongside grassroots initiatives to promote financial literacy within a CCA framework, youth-led NGOs such as Financial Literacy for Youths (FLY): Malaysia (FLY: Malaysia) and LeapEd Services could be key platforms where students gain hands-on exposure to financial literacy via events such as competitions and games, among others, specifically catered to the interests of specific age-groups.

Jason Loh and Jennifer Ley Ho Ying are part of the research team at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.

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