The Attractiveness of the Buy Now Pay Later Concept Triggers Banking Movements in Indonesia

“Buy now, pay later” (BNPL) is one of the most popular types of fintech products in Indonesia today. As the name suggests, BNPL allows customers to make purchases and make partial payments from time to time until they are paid off. BNPL has increasingly gained momentum in Indonesia over the past two years as part of the increasingly mature e-commerce and fintech sector. The main players in this sector include Kredivo, Akulaku, Traveloka PayLater, GoPay, Ovo, and ShopeePay.

Last year, 55% of new e-commerce users chose to use the BNPL option when they made a purchase on an e-commerce platform, according to survey by Kredivo and Katadata Insights Center. The survey was drawn from 10 million transactions across six e-commerce platforms conducted between January and December 2020. Overall, 41% of consumers said they use BNPL to control their monthly cash flow.

Not to be outdone, various conventional financial institutions have entered this segment by cooperating with fintech providers and BNPL. For example, Traveloka teamed up with state-owned lenders BRI and Mandiri in 2019 and 2020, respectively, for their BNPL offerings.

Meanwhile, BNI has partnered with Traveloka and Shopee PayLater. In September, BNI and Traveloka launched a “virtual card number” that allows Traveloka PayLater users to make transactions on e-commerce platforms outside the travel booking platform ecosystem.

Several banks are developing their own BNPL products. Bank Mandiri is reportedly planning to launching BNPL products in the fourth quarter of 2021, with a balance limit of up to IDR 5 million (USD 350). CIMB Niaga's comparison service is expected to be launched next year, while BCA is reportedly being study the possibilities to issue a similar product.

“This is a natural development of the technology industry. As technology and market adoption matures, incumbents will start to follow suit and create their own products,” Kenneth Li, partner at MDI Ventures told KrASIA.

BNPL is not a new concept. It is the same with existing installment financing products. However, BNPL has gained momentum due to the convenience brought by application-based integration with e-commerce platforms.

While credit card applications may take days or weeks to be approved, users can apply for a BNPL account and receive an activation notification within 24 hours, making it the preferred choice of many younger generations.

“Credit card penetration in Indonesia is very low, around 5%. Then, since the pandemic began, credit card production has slowed down. This shows an opportunity for BNPL to overtake credit cards in terms of penetration, especially due to the scalable nature of the product,” said Kenneth.

In terms of distributing short-term personal loans such as BNPL, established banks have several advantages. Banks have deeper balance sheets that set them apart from fintech startups that have received exorbitant funding. This gives banks the means to offer higher limits than standalone fintech providers. Banks also have a large consumer and merchant base who may be more willing to adopt new services, especially if they are bundled with existing features. New BNPL products developed by banks are diversifying their offerings, giving institutions a new way to reach customers who do not have credit cards, such as MSME owners.

However, Kenneth argues, it is not easy for conventional banks to imitate fintech innovations. “Traditional banks are constrained by regulation and compliance, not to mention their risk threshold is also lower than full BNPL players.” Kenneth believes that banks and fintech providers can coexist in this sector. He expects more banks to collaborate with or even acquire fintech platforms to offer this service rather than developing their own products from scratch.

“Rather than taking the risk of creating and implementing spend into new business models that may not work, it would be wise to partner with existing players and leverage an established ecosystem like an e-commerce company that already has millions of merchants and customers,” said Kenneth. .

-This article was first released by KRASIA. Re-released in Indonesian as part of the collaboration with DailySocial