This article first appeared in Forum, The Edge Malaysia Weekly on October 25, 2021 - October 31, 2021

Buy now, pay later (BNPL) has seen remarkable growth in recent years and is on track to achieve a global market value of US$700 billion by 2023. This 90% compound annual growth rate (CAGR) reflects the growing penetration of this simple transactional instrument — with consumers purchasing a product now with the agreement to pay for it later.

There have been some significant moves in the space in recent years, with major BNPL provider Klarna recently valued at more than US$45 billion, Australia-based Afterpay purchased for US$29 billion by Square, and PayPal also entering the space.

BNPL is expected to represent 12% of all e-commerce sales across Asia-Pacific, North America, Europe and Australia by 2023, up from 2% today. Some 80% of all BNPL transactions will be completed online in mature markets, with a doubling of growth for in-store BNPL purchases. With low penetration today due to a lack of customer awareness and limited availability of financial providers, Asia-Pacific is expected to be the next growth story with a remarkable CAGR of 145% projected until 2023.

The region’s retail sales market is expected to expand from US$374 billion to US$457 billion by 2023, with online sales increasing 44% annually to represent 20% of total sales by 2023. That reflects a valuable opportunity in growing BNPL penetration. Malaysia’s e-commerce market also continues to grow, with volumes doubling in the last three years, providing an attractive opportunity.

With good market demographics and early signs of accelerating adoption, Southeast Asia’s addressable market is projected to reach US$27 billion by 2023, with an expected BNPL net revenue of about US$1.5 billion. A credit card penetration rate of 19% and a predominantly young population make BNPL a tempting proposition in Malaysia. In neighbouring countries such as Indonesia, surveys show a whopping 78% of respondents expressing familiarity with BNPL and its advantages.

Funding in Southeast Asia is already outpacing Asia-Pacific, driven by investments in Singapore and Indonesia. Southeast Asian BNPL financial technology (fintech) companies attracted 30% of total BNPL funding in Asia-Pacific between 2016 and 2020, and 10% of the global total. That investment is seen in companies such as Akulaku, FinAccel and Redivo.

Mature BNPL markets such as Australia offer valuable insights. Rapid market growth has seen an estimated 20% of Australians using BNPL and about 60% of merchants offering the service. Australia’s demographics also reveal positive signs for Southeast Asia, with high usage among younger groups. Key categories include fashion and travel. And while consumers with low FICO scores dominate, users display a broad mix of creditworthiness.

The regional landscape is relatively fresh in Southeast Asia, but fintech firms such as Atome and Hoolah are expanding to target both offline and online merchants, enjoying rapid growth in transaction values. Open ecosystem players such as Akulaku and a Traveloka-Bank BRI partnership are exploiting BNPL services as part of evolving ecosystem offers. E-commerce players like Shopee and Grab are introducing BNPL as part of their standard features. Meanwhile, credit card companies and banks are exploring partnerships with winners from other markets such as Pine Labs.

Establishing the right model will require a strategy that reflects the local landscape and rapidly evolving market conditions.

While online space is critical, e-commerce players are expected to dominate this area with closed-loop solutions. Offline sales still represent the majority of sales volume and thus, scaling together with offline merchants is key. Challenges such as integration hurdles, secure customer information, educating customers in-store and maintaining positive user experience during lengthy application processes must also be overcome.

Regulation is likely to tighten, as early plays by technology companies increasingly come under the review of financial authorities. Consumer groups in Europe and Australia are already pushing for greater oversight of unregulated BNPL lenders in anti-money laundering and know-your-customer checks as well as fraud protection.

In addition, BNPL players will have to develop sustainable methods for revenue generation. While merchant-linked fees are a good way to start, we believe such fees will reduce over time. Players need to build consumer financing that leverages BNPL transaction data, coupled with value-added services such as advertising or bill payments, for a long-term model.

The success of BNPL in India offers some interesting lessons on this evolution, with four broad operating models emerging in the market.

Pureplay fintech players such as Zest are targeting underbanked segments, serving customers without credit cards with rapid-turnaround approvals. Customers opt in at online or offline check-out pages, with credit risk analysis undertaken by lending partners.

Closed-loop ecosystem players such as Flipkart and Myntra offer BNPL within an existing customer ecosystem, often supported through credit risk analysis by third-party fintech players. Consumers opt in to BNPL through the in-ecosystem check-out page.

Point-of-sale (POS) aggregators such as Pine Labs leverage in-store POS systems to drive BNPL growth. Pine Labs operates more than 450,000 POS systems across 150,000 merchants, backed by 35 banking partners. Customers can conveniently sign up to BNPL at the POS, with credit risk undertaken by partner banks.

Banks such as ICICI Bank and HDFC Bank offer pre-approved BNPL based on transaction history, with consumers able to opt in via online check-out pages. Pay later amounts are automatically deducted from savings on an agreed schedule.

While banks started this journey early with interest-free loan products, they have failed to capitalise on this head start, facing cultural barriers around attitude to risk, reluctance to transition, slow innovation pathways and poor engagement with key market segments such as millennials.

This failure to corner the market means BNPL market share remains open for acquisition. Succeeding on that journey should include focusing on seven key factors:

1.     Addressing the underserved. Embrace underserved segments with limited credit history and minimal banking exposure, and smaller merchants.

2.     Keep it simple. Leverage simple value propositions and user-friendly products.

3.     Leverage data. Use new data sources and credit risk assessments to make decisions quickly.

4.     Flexible online and offline. Integrated solutions for online and offline delivery, such as POS machines, easily integrated across merchants.

5.     Superior online UX. Deliver user-friendly online sign-up and product search.

6.     Move fast. Exploit market gaps and outdated regulations to find market opportunities.

7.     Add value. Build added value with cross-selling (loans, value-added services and advertising) beyond BNPL to diversify revenue as margins are squeezed by growing competition.

With Southeast Asia’s potential addressable market growing to US$27 billion by 2023, backed by extremely attractive demographics and market conditions, BNPL is undoubtedly set to accelerate in the region in the coming years. Choosing the right play for each market will require a tailored strategy to suit, but by leveraging the key success factors outlined above, prospective market players could buy into a substantial revenue opportunity.

Sumit Kumar is managing director and partner at Boston Consulting Group

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