Once upon a time, buy now, pay later (BNPL) was how you would explain credit to a five-year-old. That phrase has evolved into a label for something more specific and modern. And BNPL as a business is swelling at a rate that is pushing financial regulators, banks and merchants to adapt accordingly.
Malaysia's proposed Consumer Credit Act is in part a response to the rise of BNPL, which is currently not subject to direct regulation by any authority.
Task force input
In early August, an inter-agency task force published a consultation paper that provides an overview of the domestic consumer credit landscape, the rationale for the act and an outline of the new regulatory framework for the industry.
The paper seeks the public's feedback on whom the act should protect and in which aspects; the authorisation regime applicable to providers of consumer credit and related services; and the definition of the activities that will come under the act.
There are other unregulated consumer credit players – such as non-bank factoring and leasing companies, impaired loans buyers and debt collection agencies – but BNPL providers seem to be more in focus in the consultation paper.
Many observers see BNPL as the next big thing in payments that can disrupt incumbents such as banks and credit card companies
Rapid growth
'The growth in fintech innovations such as the BNPL scheme, on the back of rising e-commerce and digital payments penetration, has expanded the reach of consumer credit especially to those in the gig economy, informal sectors and millennials who may have been marginalised and without access to banking services,' says the task force led by the Ministry of Finance, Bank Negara Malaysia and the Securities Commission. 'Having made its entrance into the Malaysian consumer credit space, BNPL has seen rapid growth in a short period of time.'
As defined in the consultation paper, BNPL is an arrangement between a buyer and a third-party credit provider for the purchase of goods or services, where credit is provided without interest and the repayment due from the buyer is deferred and may be made in a single payment or by instalments within a specified payment period.
Having started as an e-commerce feature, BNPL is now also used for in-store purchases.
According to the task force, a BNPL business operates fully on a digital platform. It also has simpler on-boarding, know-your-client and authentication processes, and thus can offer on-the-spot approvals. When transactions are done via BNPL, the BNPL companies pay the merchants for the goods and services minus the agreed fees.
Next big thing?
It is understandable that BNPL gets extra attention from the Malaysian authorities. Many observers see it as the next big thing in payments that can disrupt incumbents such as banks and credit card companies.
In its 2022 Global Payments Report, payment processing company Worldpay says BNPL is projected to be the world’s fastest-growing payment method, both online and in-store, between 2021 and 2025.
Following a fourth-quarter survey last year, strategy research and consulting firm PayNXT360 concluded that the total value of merchandise sold in Malaysia on BNPL terms is expected to more than double from US$287m in 2021 to reach US$601.2m this year – up 109.5%. In comparison, the expected growth rate for Asia Pacific is 61.5%. Going by the PayNXT360 forecast, the Malaysian BNPL industry will enjoy a compound annual growth rate of 49% between 2022 and 2028.
Another figure to note comes from Bank Negara Malaysia. A survey of 10 non-bank BNPL providers showed that their combined transaction value soared from RM55m in 2020 to RM1.49bn last year.
It is obvious that there is strong demand, especially among young people, for the fintech-driven BNPL because of its ease and convenience
Digital-age finance
It is obvious that there is strong demand, especially among young people, for the fintech-driven BNPL because of its ease and convenience. It is often described as finance for the digital age.
However, digital age or not, credit has its pitfalls. Even when it is 'pay later', the payments will fall due eventually and those who buy beyond their means will experience difficulties.
This headline from a May 2022 article in SFGATE, a San Francisco-based news site, says it all: 'BNPL is sending the TikTok generation spiralling into debt.'
It is timely that there will soon be legislation to reform consumer credit in Malaysia. That should protect consumers against unfair and unethical conduct. But no law can shield us from ignorance and our own bad impulses and habits.
Financial literacy for all remains an important goal. Perhaps it is not a bad idea to also teach five-year-olds that credit is not without risks.
