‘Buy now, pay later’ takes off in Indonesia, but risks are high



In the age of the digitally driven 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 just a few clicks on your smartphone. Moreover, if you run out of cash, you can even pay it later 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 cleared. The concept of BNPL is not new, as it is similar to existing installment finance products. However, application-based BNPL offerings are gaining traction among millennials and Gen Z buyers in Southeast Asia thanks to the boom in e-commerce, thanks to its convenience and practicality.

Indonesia’s credit gap is still large, while credit card penetration is low at around 5%. This translates into an opportunity for BNPL to fill this gap and offer personal loans to underserved clients.

“As the adoption of smartphones in the region increases, application-based services like BNPL make accessing financial services very easy. Many Indonesians are financially excluded, so BNPL offers them a way to access credit, ”said Zennon Kapron, director of financial technology research and consultancy Kapronasia. KrASIA.

Currently, almost all e-commerce platforms in Indonesia adopt BNPL payment methods by partnering with different fintech providers. Kredivo, headquartered in Jakarta, has been a pioneer in the BNPL fintech segment since 2016, while other major BNPL players in the country include Akulaku, Home Credit, Traveloka PayLater and Shopee PayLater.

Boost e-commerce transactions

BNPL offers many advantages to traders. It helps vendors increase add-to-cart conversion rates and transaction value, as well as reach new potential customers. In 2020, 55% of new e-commerce users in Indonesia chose to use BNPL options when making purchases on e-commerce platforms, according to a survey by Kredivo and the Katadata Insights Center. The survey was based on 10 million transactions across six e-commerce platforms made between January and December 2020.

“BNPL providers are riding the wave of e-commerce, which is a natural progression as credit will increase the purchasing power of consumers on e-commerce platforms,” said Kenneth Li, partner at MDI Ventures, a funder of several fintech companies, including Kredivo. By partnering with e-commerce platforms, BNPL providers can track users’ spending habits, which will add additional information to their credit scoring engines to assess potential risks when lending money. or the granting of credit, he added.

Online platforms and fintech operators have seen steady growth in BNPL transactions over the past year. Traveloka, the first non-fintech company to offer this service in Indonesia from 2018, has seen its PayLater users increase by 750% since the program launched.

At the same time, on Tokopedia, BNPL transactions doubled in 2020. The e-commerce platform partners with players such as GoPay, Ovo, Kredivo and Indodana for its BNPL programs. Bligli, which also works with Indodana for its BNPL service, saw monthly growth of 63% between May and October last year. KrASIA could not find data on BNPL transactions on other e-commerce platforms such as Shopee, Bukalapak and Lazada.

As for Kredivo, its total user base has doubled in the past ten months, and its annualized revenue has also doubled in the previous seven months, said the company’s vice president of marketing and communications. , Indina Andamari. KrASIA. Kredivo is currently a partner of ten e-commerce platforms and has nearly 4 million customers. “We are offering a balance limit of up to IDR 30 million ($ 2,105), which is the highest among BNPL players in the country,” Andamari said.

The reverse side of BNPL: Growing consumerism, potential debt trap

The idea of ​​buying a product without spending any money right away is very tempting to many people. Consumers could have a false sense of security, which could lead to impulse purchases, and they could end up spending money they don’t have.

A quick search on Konsumen Media, a site that helps consumers voice their opinions, has many complaints related to BNPL’s offerings. Several clients wrote open letters on the website asking for interest rate reductions or late fees because they were unable to repay their debt. Some users have even described unethical debt collection practices on the part of BNPL’s vendors, while others have reported mysterious and unauthorized transactions on their subsequent payment accounts.

There is also a lack of education around BNPL, which could lead to overconsumption. Applying for a BNPL account is straightforward: on most platforms it only takes about 24 hours to verify and then a user’s account is activated. BNPL does not require a salary or income statement, which makes it much simpler than applying for a credit card. However, BNPL could give consumers access to credit they cannot afford, which could lead to a debt trap from which it becomes more difficult to escape with each late payment.

“Overall there has been very little regulation around BNPL, so there is definitely 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 could get caught up in hidden or hard to understand charges, ”Kapron said.

The biggest source of revenue for BNPL providers are transaction fees obtained from retailers or digital marketplaces. These fees tend 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 credit cars. ordinary. The larger reduction often comes with the promise of higher transaction values ​​for traders.

However, companies also derive additional revenue from penalties applied for late payments, which customers may not be aware of. Shopee and Traveloka’s later payment options charge a late fee of 5% per month of the invoice total. During this time, Kredivo charges 6%.

“Like credit card companies, we charge our customers interest, but our rate is among the lowest in the country. We offer 0% plans for subsequent payment in 30 days or 3 months. Our merchant fees are also low, ”said Andamari de Kredivo, without revealing the exact amount. She added that the NPL ratio on the platform is currently low, around 2.5% to 3%.

Despite some of the risks mentioned, Li of MDI Ventures argued that BNPL’s benefits outweigh its threats, as the service allows unbanked and underbanked clients to access credit. It can help clients keep their cash flow in check and possibly improve their livelihoods.

“BNPPL’s ​​service providers certainly need to be responsible for giving clients balance limits. They can do this by properly training the credit scoring engine so as not to overburden individuals with overspending, ”Li said.

Continuous growth

It looks like BNPL is here to stay. Buy now, pay later payments in the country are expected to grow 72.8% annually to reach $ 1.537 billion in 2021, according to a report from PayNXT360, a payments-focused business intelligence platform. BNPL’s gross merchandise value in the country is expected to increase from $ 889.7 million in 2020 to $ 9.2 billion by 2028.

BNPL providers are also working with banks to provide loans to more customers. In September, Traveloka partnered with Bank Negara Indonesia to launch a “later virtual payment card number”, the first in Southeast Asia. Customers can use the virtual card number to shop on many e-commerce platforms such as Shopee, Lazada, JD.id, Bukalapak, and Tokopedia. The company is also partnering with public lender BRI and Bank Mandiri for the Traveloka PayLater Card and Traveloka Mandiri Card, two offerings that allow users to transact with all offline and online merchants supported by the. Visa network.

The country’s major banks are also looking for a larger share of the market and have started to develop their own late payment products to reach new customers, especially those who do not have a credit card. 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 infancy in Indonesia. As the adoption of digital payments continues to grow, BNPL will also thrive, ”he said.

Read more: As ‘buy now, pay later’ gains traction in Indonesia, banks are after some of the action

As the market matures, authorities are likely to impose more stringent guidelines for this segment. For example, the Monetary Authority of Singapore is currently reviewing the appropriate regulatory approach for BNPL due to concerns over consumer debt. In Indonesia, the Financial Services Authority, or OJK, dictates the rules BNPL’s fintech players must obey to operate. It is not yet known whether the body will revise the framework anytime soon.

“We expect regulators to pay more attention to the segment in the future, which will likely limit the gains for BNPL providers in the long run,” Kapron said.



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