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When 32-year-old editor Samantha Tan signed up for a BNPL (buy now, pay later) platform last year, it was mostly to redeem discounts. Her first few transactions were seamless, but it was only when she tried returning an online purchase that things got complicated: The staff told her to complete the instalments in full so they could give her a cash refund at the store.

But because it was an online purchase, she had to schedule a pickup, which never happened. She’s now stuck with the items, and does not have a solution at hand. She adds: “The annoying thing was that I did have the money to spend. It was just an impulse buy at the end of the month and I wanted to feel less guilty about spending.”

You might have seen the eye-catching signs of Atome, Hoolah and Pace at the check-out counters of both offline and e-commerce retailers. This is how they work: You rack up a bill of, say, $200, and you have the option to pay the full sum instantly using conventional methods (cash, debit or credit card), or use a BNPL platform to split the interest-free payment over a couple of months.

Many retailers also offer rewards and discounts only for BNPL users. You also have the option of clearing your debts ahead of time, without incurring a fee. In Singapore, a 2021 research report by consumer research and analytics company Milieu Insight noted that around 19 per cent of the adult population have used a BNPL platform, out of which, 73 per cent attested that they would continue doing so. In 2021, BNPL transactions amounted to US$317 million ($441 million) in Singapore (which accounts for less than 0.5 per cent of total credit and debit transactions), and are predicted to increase to an estimated US$3 billion ($4 billion) by 2028, according to a PayNXT360 report.

The trend is in part fuelled by a growing mistrust of credit cards by Gen Z and millennials. Sandeep Malhotra, executive vice-president, Products & Innovation, Asia Pacific, Mastercard, says: “Gen Z and younger millennials are the first true digital natives. While they carry fewer credit cards than older generations, recent research from Mastercard found that more than 90 per cent of Gen Zers and millennials in the Asia-Pacific region used a wide range of digital payment methods (including BNPL) in the past year, demonstrating their willingness to consider and use multiple payment
options to suit their needs in different situations.”

Atome’s CEO David Chen notes similar habits among the users of his BNPL platform: “Sixty per cent of our customers prefer to use debit cards as a repayment option, even though they do have or are eligible for credit cards. Through our extensive market research, we also found that younger consumers don’t like the idea of applying for financial products that charge interests and annual fees. Many of them like to shop, but also want a way to control and manage spending without getting into debt.”

The average basket size for a BNPL transaction is $100, and David says that the most popular segments are fashion, beauty, cosmetics, home and living. He affirms that “more confidence has to be built around the usage and normalisation of BNPL”.

Turochas Fuad, founder and CEO of Pace, goes on to add that he believes that BNPL is still a “nascent technology” in Singapore, with high growth potential. “I expect to see BNPL grow in popularity, not only because of its ability to split payments, but also because of its diverse benefits. This can include easy merchant discovery, exclusive discounts, or loyalty rewards through points, cashback or rebates.”

Recent research from Mastercard found that more than 90% of Gen Zers and Millenials in the Asia-Pacific region used a wide range of digital payment methods (including BNPL) in the past year.

“Are we encouraging people to go into debt, although they may not see it as debt and just see it as three easy payments?” he asked. His sentiments are echoed by experts including chief credit analyst for Lending Tree, Matt Schulz, who told CNBC: “With buy now, pay later loans, since they’re so new, the process isn’t quite down to a science.”

The fact is that it is laughingly fast and easy to set up an account on any BNPL platform. Says Mastercard’s Sandeep: “Account set-up takes no more than a few minutes, requires little personal information, and credit approval is given in just a few seconds during the checkout process.”

Given that credit checks are minimal, BNPL platforms are investing in various tools. At Atome, David says: “We evaluate consumers’ early repayment capabilities, and personalise spend limits based on historical purchases and payment behaviours.” Meanwhile, Pace’s Turochas asserts that: “We continuously develop our bespoke credit scoring algorithm to match users with appropriate buying limits. Our algorithm does checks from across a variety of data points, including the Credit Bureau Singapore (CBS).”

Credit cards or BNPL?

The question persists: Are BNPL platforms encouraging people to live beyond their means? We live in an era of instant gratification, and the temptation to defer the payment for later, without having to worry about interest rates, is high.

The Milieu report highlights that Singaporeans take a conservative stance towards debt, with 70 per cent of the respondents highlighting that they would rather pay full price. Yet, a report about BNPL by global financial services platform Finder reveals that out 1,008 Singaporeans surveyed, 27 per cent said that they are financially worse off since using the software, while 11 per cent mentioned that by using BNPL, they have “overstretched their budget so far that they’ve struggled to pay for other expenses”.

Currently, there are no regulations in place to protect consumers nor the platforms, but a statement by the Monetary Association of Singapore (MAS) last year stated that “BNPL schemes offered in Singapore currently do not pose significant risk of consumer indebtedness. This takes into consideration that some common practices of BNPL schemes offered here today limit the extent of debt accumulation by consumers”.

However, we will probably see some framework by the end of 2022, as the Fintech Association (SFA) has worked with MAS to set up a BNPL Working Group, which will be releasing a Code of Conduct. Shadab Taiyabi, president of SFA says: “The Code’s main focus is to protect consumers, and some measures or focus areas include: fostering greater adoption of the BNPL code and enforceability, protecting vulnerable consumers from getting into financial difficulties due to the use of BNPL schemes, as well as ensuring fair dealing and safeguards against providing misleading information to consumers.”

The good, bad and ugly

It’s important to note that the platforms earn revenue from merchants, not the customers. How it works is that the platform pays the merchant in full for that $80 top you purchase (minus commissions), which means it bears the risks associated with your purchase.

Says Atome’s David: “Our business model charges merchants a transaction fee, and does not charge consumers for the service. Fundamentally, it is predicated on users paying on time, every time; otherwise, they will be suspended from using the service.”

Finder reveals that out 1,008 Singaporeans surveyed, 27% said that they are financially worse off since using the software, while 11 per cent mentioned that by using BNPL, they have “overstretched their budget so far that they’ve struggled to pay for other expenses”.

He adds: “So for us, if there are more users who miss payment and are suspended from using the account, it’s not viable or healthy for our business. We are incentivised and motivated to educate and ensure that users shop responsibly and pay on time, every time with Atome.”

Unlike a credit card, where interest rates are compounded the more you defer your payment, these platforms charge a flat fee (for Atome, it’s $15) or a fee pegged to the amount used (for Hoolah, it starts from $5 to $30). If you’re unable to make the payment, the system will simply suspend your account, in a way protecting you from accumulating more debt.

As Sandeep puts it: “With credit cards, if purchases are not paid off in full before the monthly due date, interest and late fees will be charged.” David adds: “Unlike traditional credit cards, we do not make any money by charging consumers interest from their outstanding balance.”

So say you do end up missing a payment for whatever reason – you could have forgotten to top up your account, or you lose your job – then what? You will get multiple reminders via e-mail, text messages or phone calls. Some users have lamented the “loan shark-like” behaviour of BNPL platforms, reporting incessant calls.

Nicholas Ko, head of marketing for Wiz AI, the guys behind the realistic-sounding AI-operated customer service representatives, says that they work closely with BNPL platforms to automate the debt collection reminders. He underlines the growing sophistication of the AI technology, which can recognise emotions and categorise calls that need to be followed up by a human agent. “The AI escalates the cases that need a personalised touch and emotion to a human agent,” he explains, adding that it leads to an overall better customer experience.

David adds that Atome is also constantly “beefing up our customer service team and operations, and monitoring the customer feedback channels very carefully. We have placed heavy emphasis on important consumer touchpoints such as customer service, ease of product usage, and ensuring full disclosures and no hidden fees.”

Encouraging good spending behavior

There are also measures that BNPL platforms have put in place to encourage sustainable spending. For instance, most apps make it easy for users to keep track of their expenses, and have set age limits.

On top of frequent reminders, Atome also incentivises on-time payment with points, gamification and loyalty points, while Pace lso offers “customised buy limits with real-time attribution based on a user’s profile”. Meanwhile, Atome has also invested in financial education content.

Samantha, however, says she’s done with BNPL platforms: “I might not bother with the platform just because of my experience. I also didn’t like that there were months when I forgot payments had to be deducted, and those weren’t fun surprises.”

Whatever your choice – debit card, credit card, or BNPL – the onus also lies on the customer. BNPL platforms have plenty of advantages to offer, including discounts and interest-free short-term payments. Our advice? Approach it like you would a mortgage: Make sure you have an oversight of your monthly expenditures and whether you can afford the payment if you lose your job. And always make sure you have enough money saved for a rainy day.