According to FIS, BNPL will only account for up to 2% of ecommerce payment methods by value in Asia Pacific by 2025, a modest estimated growth from 1% in 2021. On the other hand, BNPL in Europe is expected to hit 12% and North America at 9% by 2025.

The stiff competition from existing payment options plays a big factor in the slow growth of the new consumer financing method. In 2021, in the online and offline retail sector in Asia, BNPL made up 2% of payments by value at physical stores in Hong Kong, compared to 55% for credit cards. India has 1% BNPL share in point-of-sale (POS) against 18% for credit cards. BNPL made up 3% of payment methods used in e-commerce in Indonesia, compared to 10% for credit cards. Malaysia has a 4% BNPL share in e-commerce against 42% for credit cards. The Philippines is at 2% against 16% for credit cards. Singapore saw BNPL take up 4% of e-commerce payment means, compared to 42% for credit cards.

BNPL and Credit Card payments as a share of e-commerce and point-of-sale (POS) payments in Asia Pacific in 2021

Source: TABInsights

The largest BNPL firms such as Afterpay and Paidy are currently running average profit margins of -15% per annum (PA). New players in emerging markets like the Philippines’ Cashalo and Indonesia’s Akulaku are suffering -100% PA profit margin. BNPL players are facing a combined loss of $5.2 billion by 2025. Losses are even more pronounced for BNPL players in emerging markets due to their stronger focus on long tail, unbanked or underbanked consumers, which leads to much larger credit losses and funding costs.

Afterpay reported a $159.4 million loss for the 2021 financial year, compared to $22.9 million loss in the previous year. Zip reported a $658.8 million loss for 2021, a 3,204% increase on the $20 million loss it reported in the 2020 financial year.

Bad debts for Australian BNPL companies reportedly totalled $220 million on $11.4 billion of sales during 2021, compared with bad debts in the charge cards sector, which includes Amex and Diners Club, of $15.4 million on $56.8 billion of sales.

There is also a lack of education about the new consumer financing trend that leads to over-consumption. Applying for a BNPL account is easier than credit card application. On most platforms, it only takes around 24 hours to be verified, and then a user’s account is activated. BNPL doesn’t require a salary or income statement, making it much simpler than a credit card application. However, BNPL could give consumers access to credit that they can’t afford, which could lead to a debt trap that becomes more difficult to escape from with each late payment.

The absence of regulation has helped BNPL players grow and keep costs down but would likely be changed as regulators across the region are now developing regulatory requirements to safeguard consumer interests and prevent risks of over-indebtedness. The regulators are also looking to toughen rules on back-office payments processing, know your customer (KYC) requirements, due diligence and anti-money laundering provisions for BNPL players. Thus, when stringent rules are implemented, profit margins would likely be squeezed.

Malaysia will enact Consumer Credit Act this year. It aims to strengthen regulatory arrangements for all consumer credit activities, which includes providers of BNPL schemes. In Indonesia, there is no specific laws for the BNPL industry but the players must comply with certain requirements for credit services. Bank Indonesia (BI) enacted new regulations that mandate non-bank payment services need to have at least 15% Indonesian owners, while at least 51% of shares with voting rights must be owned by Indonesians, individuals or entities. Non-bank payment infrastructure companies must be at least 80% Indonesian-owned.

Japan has yet to draft laws that promotes BNPL, given that regulators are unsure if the consumer financing scheme will prosper in the market. In 2022, Singapore Fintech Association forms working group to establish BNPL framework, which will include enforcement measures, to safeguard consumer interests and prevent risks of ‘over-indebtedness.’ The Philippines enacted comprehensive laws and regulations on credit services, with established licensing requirements and regulatory expectations. Australia has an upcoming reform on payments regulation to include the imposition of more stringent supervision on BNPL providers and the industry.

There are several developments and initiatives made by the players to fuel the growth of BNPL industry and attract more customers in the region. In September 2021, Austrlia’s ZIP announced investment worth $50 million to acquire a minority stake in India’s BNPL platform, ZestMoney.  In December 2021, Australia’s Latitude announced its plans to enter into a strategic partnership with Singapore’s retailer, Harvey Norman, to spearhead its launch in the Southeast Asian BNPL market.

In August 2021, Square looks to expand into BNPL space with its acquisition of AfterPay through a $29 billion deal. In November 2021, Afterpay announced the launch of new money and lifestyle app, Money by Afterpay. It is expected to provide 3.6 million Afterpay users access to a brand-new money experience such as new functions that will enable customers to look at their savings and spending in one app.  In September 2021, Paypal acquired Japan’s Paidy worth $2.7 billion.

In August 2021, Indonesian online lender Kredivo announced its expansion of BNPL service in Vietnam.  In October 2021, Atome, one of the largest BNPL providers across Asia, announced that the firm is entering the Philippines. The firm has entered into a strategic partnership with more than 100 retailers, both online and offline, across the country.

BNPL seems rather unprofitable in the region despite early investors’ much hype. Industry players must optimise their business models which include focusing on customer targeting and user retention. In addition, players should focus on refining their credit assessment process in order for creditworthiness to be accurately evaluated, through leveraging of alternative data and customer behaviours.

BNPL players should gradually expand to high-end merchants and higher-income and lower risk users to drive up ticket size. Players must have a clear strategy that boosts efficiency and reduce customer acquisition costs.