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The concept of Buy Now Pay Later in Indonesia is increasingly widespread, the risk is still high

While the BNPL payment method can improve e-commerce performance, it can also encourage consumerism and potential debt among consumers.

In the era of lifestyle digital-first, shopping has never been easier, thanks to e-commerce and fintech. When you see the item you want on social media or in the marketplace, you can buy it and have it shipped right away with a few taps on your smartphone. Then, if you are short on cash, you can even pay it later using the BNPL method.

BNPL is an abbreviation of buy now pay later or in Indonesian “buy now, pay later.” This allows customers to commit to purchases and make partial payments over time until the balance is settled. The BNPL concept is not new, because it is similar to existing installment financing products. However, BNPL's app-based offerings are gaining momentum among millennial and Gen Z shoppers in Southeast Asia on the back of the e-commerce boom, thanks to their convenience and practicality.

The loan gap in Indonesia is still significant, while credit card penetration is still low at 5%. This is an opportunity for BNPL to fill this gap and provide personal loans to underserved customers.

“With increasing adoption smartphone across the region, application-based services such as BNPL make access to financial services very easy. Many Indonesians are financially excluded, so BNPL offers them a way to access credit,” Zennon Kapron, director of research and fintech consulting firm Kapronasia, told KrASIA.

Currently, almost all e-commerce platforms in Indonesia adopt the BNPL checkout method by partnering with various fintech providers. Kredivo which is headquartered in Jakarta has become one of the pioneers in the BNPL fintech segment since 2016, while other major BNPL players in the country are included Akulaku, Home Credit, Traveloka PayLater, and Shopee PayLater.

Increase e-commerce transactions

BNPL brings many benefits to merchant. This helps vendors increase conversion rates and transaction value add-to-cartand reach new potential customers. In 2020, 55% of users E-commerce newbies in Indonesia choose to use the BNPL option when making purchases on e-commerce platforms, according to survey which is conducted by Kredivo and Katadata Insights Center. The survey is based on 10 million transactions across six e-commerce platforms conducted between January and December 2020.

“BNPL providers are riding the e-commerce wave, which is a natural development as credit will increase consumers' purchasing power on e-commerce platforms,” said Kenneth Li, partner at MDI Ventures, a backer of several fintech companies, including Kredivo. By partnering with the platform E-commerce, BNPL providers can track users' spending habits, which will further add insight to their credit scoring engine to evaluate potential risks when lending money or extending credit, he added.

Online platforms and operators fintech has reported steady growth in BNPL transactions over the past year. Traveloka—company non-fintech the first one offering this service in Indonesia since 2018—get user upgrade PayLater by 750% since the program was launched.

At the same time, on Tokopedia, BNPL transactions are increasing double in 2020. This e-commerce platform partners with players such as GoPay, Ovo, Kredivo, and Indodana for its BNPL program. Blibli, which is also working with Indodana for its BNPL services, reports 63% monthly growth between May and October last year. KrASIA could not find data about BNPL transactions on the platform E-commerce others such as Shopee, Bukalapak, and Lazada.

As for Kredivo, its total user base has doubled in the last ten months, and its annual revenue has also doubled over the previous seven months, VP of marketing and corporate communications, Indina Andamari, told KrASIA. Kredivo currently partners with ten e-commerce platforms and has nearly 4 million customers. “We offer a balance limit of up to IDR 30 million (USD 2.105), which is the highest among BNPL players in the country,” said Indina.

The other side paylater: Increase consumerism and the potential to be trapped in debt

The idea of ​​buying a product without directly spending money is very tempting for many people. Consumers may get a false sense of security, which can lead to impulsive shopping, and they may spend money they don't have.

A quick search on Consumer Media, a site that helps consumers voice their opinions, shows many complaints regarding BNPL's offerings. Some customers wrote an open letter on the website requesting interest rate reduction or late fees, because they cannot pay off their debts. Some users even described unethical debt collection practices by BNPL providers, while others report transactions mysterious and illegitimate on their payment account later.

This includes the lack of education around BNPL, which can lead to overconsumption. Applying for a BNPL account is easy—on most platforms, it only takes about 24 hours to be verified, and then the user account is activated. BNPL does not require a salary or income statement, making it simpler than a credit card application. However, BNPL can provide consumers with access to credit they cannot afford, which can create a debt trap that becomes increasingly difficult to break with each late payment.

“Globally, there is very little regulation around BNPL, this ensures there is risk in the existing model. It remains to be seen what the impact will be for consumers who may or may not be familiar with this type of model and may be trapped by hidden or elusive costs,” said Zennon.

The biggest source of income for BNPL providers is transaction fees obtained from retailers or digital markets. These fees tend to be higher than regular credit or debit card transactions, with processing fees ranging from 2% to 8% per transaction, compared to 1,3% to 3,5% on regular credit cars. Larger cuts often come with the promise of higher transaction value for the trader.

However, the company also earns additional revenue from penalties applied to late payments, something customers may not be aware of. The pay later option from Shopee and Traveloka charges a late fee of 5% per month of the total bill. Meanwhile, Kredivo charge a 6% rate.

“Similar to credit card companies, we charge our customers interest, but our rates are among the lowest in the country. We offer a 0% plan for later payments in 30 days or three months in installments. Our merchant fees are also low,” said Indina from Kredivo, without revealing the exact amount. He added, the ratio of non-performing loans on the platform is currently low, around 2,5% to 3%.

Despite some of the risks mentioned, Kenneth of MDI Ventures argues that the benefits of BNPL outweigh the threats, as the service allows unbanked and unbanked customers to access credit. This can help customers keep their cash flow under control and ultimately improve their livelihoods.

“The BNPL service provider must of course be responsible for providing balance limits to customers. They can do this by properly training the credit scoring engine so as not to burden the individual with overspending,” concluded Kenneth.

Comparison between service providers in Indonesia

 

Full data can be seen via the link related to

Sustainable growth

Looks like BNPL is there to stay. “Buy now, pay later” payments in the country are expected to grow by 72,8% annually to reach USD 1,537 billion by 2021, according to a report. report by PayNXT360, a payment-focused business intelligence platform. Domestic BNPL gross merchandise value is projected to increase from USD 889,7 million in 2020 to USD 9,2 billion in 2028.

BNPL providers are also working with banks to extend loans to more customers. In September, Traveloka partnered with Bank Negara Indonesia to launch “virtual payment card number”, the first in Southeast Asia. Customers can use virtual card numbers to shop on various e-commerce platforms such as Shopee, Lazada, JD.id, Bukalapak, and Tokopedia. The company also partners with state-owned lenders BRI and Bank Mandiri to Traveloka PayLater Card and Traveloka Mandiri Card, two offerings that allow users to transact with offline and online merchants powered by the Visa network.

Major banks across the country are also pursuing a larger market share and have started developing their own pay later products to reach new customers, especially those without credit cards. However, Kenneth hopes to see more collaborations between fintechs and traditional banks and other financial institutions in the near future. “The BNPL market is still in its early stages in Indonesia. As digital payment adoption continues to grow, BNPL will also grow,” he said.

As the market matures, the authorities are likely to enforce stricter guidelines for this segment. For example, the Monetary Authority of Singapore is currently reviewing the appropriate regulatory approach for BNPL amid concerns over consumer debt. In Indonesia, the Financial Services Authority or OJK stipulates rules that must be obeyed by BNPL fintech players to operate. It is not yet known whether the organ will revise the skeleton in the near future.

“We expect regulators to pay more attention to the segment in the future, which is likely to limit profits for BNPL providers in the long term,” Kapron said.

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

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