Moody’s: “Buy now, pay later” poses no threat to traditional banks

by FAYYADH JAAFAR / pic credit Fave

THE emergence of buy now, pay later (BNPL) services in South-East Asia is unlikely to cause significant damage to established banks in the region despite the fact that these companies have been able to attract a considerable number of customers, especially among younger people who prefer using mobile wallets over credit cards.

According to Moody’s Investors Service, BNPL transactions have increased significantly since the coronavirus pandemic started, with restrictions on movement and social interaction pushing consumers to use e-commerce platforms more.

“BNPL companies will not pose a major threat to banks in Asean. The difficulties BNPL companies face in expanding mean their main payment services will not displace credit cards.

“Some BNPL businesses could expand their offerings to products such as unsecured loans, which can help improve their profitability, but even if they do, their small scale would limit their ability to take on banks,” it said in a report yesterday.

According to Moody’s, Asean’s BNPL sector has grown rapidly in recent years due to the increasing use of e-commerce platforms and the Covid-19 pandemic. 

However, the rapid growth of BNPL as a payment option will be tempered by various challenges, including the lack of availability of financial services in rural areas, the high cost of using the services, and the lack of consumer awareness.

“Growth in e-commerce will help BNPL expand in Asean. E-commerce will continue to grow fast in Asean as its convenience appeals to consumers. The use of BNPL services as a payment option for online shopping will increase in tandem, though from a low base, as their benefits appeal to both consumers and merchants,” the report stated.

“Low rates of banking penetration and young demographics are also favourable for BNPL’s growth. The large pool of consumers with limited access to banking services presents an opportunity for BNPL companies because their services are easy to use.”

“Also, large populations of young adults give the BNPL sector ample growth potential because they actively shop online and are the primary users of BNPL services,” the report stated.

Moody’s expects BNPL companies to continue to face numerous challenges in expanding their operations.

Among other difficulties, BNPL companies are incurring high expenses and investing heavily in technology to achieve fast growth amid intense competition, resulting in hefty losses. 

In addition, the tightening of monetary policy globally will result in higher borrowing costs for BNPL companies. Rising rates will also erode consumers’ repayment capacity, raising asset risk for BNPL companies.

Obtaining funding will become more difficult for BNPL companies as investors become more risk-averse amid declines in the valuations of BNPL companies. An increase in regulatory scrutiny could also hinder the sector’s growth.

E-commerce will increase further as e-commerce transaction values in key Asean countries will increase at compound annual growth rates exceeding 15% during 2021-25, according to a projection by FIS Global.

The report added that low rates of banking penetration in most parts of Asean, coupled with young demographics, will also help BNPL increase adoption in the region as consumers seek ways to manage their finances.

Additionally, it said that significant proportions of the populations in Asean countries, except for Singapore and Malaysia, have limited access to financial services or lack bank accounts. Obtaining formal credit could be difficult for such individuals because they often lack credit histories or stable income that traditional banks require when approving applications for credit cards or loans.

Moody’s added that the large pool of consumers with limited access to banking services presents an opportunity for BNPL companies because their services are easy to use, as BNPL schemes do not require a credit record or proof of income, as obtaining a bank loan or credit card does.

“In Indonesia, Thailand, Vietnam and Cambodia, BNPL is more commonly used than credit cards,” Moody’s said.

Additionally, demand for any form of credit will grow as economies in Asean recover from the pandemic.

“This will be a boon to BNPL companies in particular, as they will capture untapped opportunities from consumers who would otherwise be unable to borrow in a region that the World Economic Forum projects will be the fourth largest economy as a whole by 2030,” Moody’s said.

In addition, BNPL companies run high risks of their users’ defaulting on payments.

Moody’s also said that BNPL companies will have to increase provisions as rising interest rates erode consumers’ disposable income and strain their repayment capacity. 

“Some major BNPL companies have indicated that they will implement checks on users’ creditworthiness, which, however, will hurt business growth,” it said.