Despite early investor hype, buy now, pay later (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. In contrast, the growth of BNPL usage in Europe is expected to hit 12%, and 9% in North America by 2025, according to payment processing company, Worldpay from FIS.

The stiff competition from existing payment options plays a big factor in the slow growth of the new consumer financing method. In 2021,  BNPL made up 2% of share in point-of-sale (POS) in Hong Kong, compared to 55% for credit cards. India has 1% of BNPL usage  against 18% for credit cards. In Indonesia, BNPL made up 3% of payment methods used in e-commerce, 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. BNPL represented  4% of Singapore e-commerce payment volume, compared to 42% for credit cards.

The larger 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 will face 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 are expected to lead to much larger credit losses and funding costs.

Afterpay reported a $159.4 million loss for the 2021 financial year, compared to a $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 the charge cards sector that which includes players such Amex and Diners Club which reported $15.4 million of delinquent loans on $56.8 billion of sales.

There is also a lack of consumer education about the new financing trend that leads to over-consumption. Applying for a BNPL account is easier than fpr a  credit card. On most platforms, it only takes around 24 hours to be verified, and a user 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.

The absence of regulation has helped BNPL players grow and keep costs down but would likely change as authorities across the region are now developing laws 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 these stringent rules are implemented, profit margins would likely be further squeezed.

Malaysia will enact a consumer credit act this year. It aims to strengthen regulation of all consumer credit activities, which include providers of BNPL schemes. In Indonesia, while there is no current specific laws for the BNPL industry, players must comply with certain requirements for credit services. Bank Indonesia (BI) enacted new regulations that mandate non-bank payment services to have at least 15% Indonesian ownership, 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 on BNPL, given that regulators are unsure if the consumer financing scheme will prosper in the market. In early 2022, Singapore Fintech Association formed a working group to establish a BNPL framework, which will include enforcement measures, to safeguard consumer interests and prevent risks of ‘over-indebtedness.’ The Philippines established comprehensive laws and regulations on credit services that include licensing requirements and regulatory expectations. Australia has an upcoming reform on payments regulation to include the imposition of more stringent supervision on BNPL providers as well as the industry at large.

Players are also taking steps to grow the industry and attract more customers. In August 2021, Square looked to expand into the BNPL space by acquiring AfterPay in 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 users access to a brand-new money experience such as consolidating their savings and spending in one app.  In the same month, Indonesian online lender Kredivo announced the expansion of its BNPL service in Vietnam.

In September 2021, Austrlia’s ZIP announced investment worth $50 million to acquire a minority stake in India’s BNPL platform, ZestMoney.  A couple of months later, its domestic peer, Latitude announced plans to enter into a strategic partnership with Singapore’s retailer, Harvey Norman, to spearhead its launch in the Southeast Asian market.

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. In September 2021, Paypal acquired Japan’s Paidy in a deal worth $2.7 billion.

Despite the recent surge in mergers and acquisitions as well as seemingly strong eraly investor interest, the BNPL industry in Asia Pacific still faces an uphill task in gaining traction and turning a profit. Industry players must optimise their business models, focus on customer targeting and user retention to grow in both aspects. In addition, players should focus on refining their credit assessment process by leveraging alternative data and customer behaviour. They 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.