Buy Now Pay Later (BNPL) has become increasingly popular in the Malaysian ecosystem especially with the emergence of Shopee’s SPaylater or atome pay that allows us to break our hefty bills down into instalments. Even the world’s most valuable company, Apple Inc has recently announced it’s integration of an instalment scheme into it’s Apple Pay service.
By breaking down the high price tags into small churnable payments, BNPL has definitely become a game changer that allows us to afford better things in life. Nevertheless, there can never be too many good things in life with a dash of disadvantages (or alternative viewpoints?) to consider, so let’s dive into it!
Breaking finances down for higher quality of living
Most of the time there are unlimited wants and needs in our lives yet our spending is limited to our budget constraints. Sometimes, we are just unable to afford what’s necessarily needed. The easiest example to illustrate this is a student needing a laptop, but is unable to pay a few thousand upfront. Hence, by buying the laptop first and paying later, a once hefty sum is broken up to into small payments of several hundred each month.
Conversely, when purchasing high valued possessions such as houses, instalment prices allow you to hedge against potential price inflation.
Say that:
- The Price of a Playstation 5 is RM2300, but you believe in the future with the semiconductor shortage it will cost RM3000
- If you as a customer don’t have enough to purchase it now, you can take out a Buy Now Pay Later solution
- Instead of paying RM3000 in the future, you can choose to pay RM575 over 4 months
Hence, we can afford higher valued items while making room for savings.
Money on Hand is Better than None
The saying, “a dollar on hand today is worth more than a dollar promised in the future” signifies the importance of having money on hand. The possession of monetary savings can shelter us from the risk of losing future income or hedge against unexpected high costs. See the “Time Value of Money”, to gain further insight into the saying.
“Borrowing Money Never Comes without Costs”
It is important to note that the BNPL scheme is currently unregulated by the Central Bank of Malaysia – as they’re technically non-financial institutions. Hence, there are significant underlying cons in using the BNPL scheme.
The shared mistake that many BNPL users make is that they tend to be more irresponsible towards the payment deadline. Most users are oblivious to the fact that delayed payments would affect their overall credit score. According to studies, half the BNPL users are unaware that penalties would be imposed due to missed deadlines. However, the companies that offer BNPLs have the right to report missed payments to credit reference agencies, including CTOS and CCRIS. CTOS, is a private agency in Malaysia that provides credit score reports to users and businesses. CCRIS is Bank Negara’s Internal Credit Reporting Agency that provides financial institutions information on users to determine credit risk.
If reports like these accumulate over time, future loan applications for mortgages, for example, would not be approved easily.
Payments may continue even if item is returned
Furthermore, the process of getting a refund is more of a hassle then one may be used to. Even when users have returned the goods to the shop, the payment will still continue until the shop informs the BNPL of the refund. Hence, even when the item has been refunded, you may still need to still make payments until the BNPL lender has halted the transaction, posing a challenge for those with constrained cash flows.
How do BNPL providers make money: In the case of Klarna
Klarna is a Swedish Fintech Company that operates in 20 countries and offers Buy Now Pay Later Solutions to businesses.
Klarna collaborates with businesses to provide the service for their customers to pay for the products in several instalments by charging zero interest. Klarna generates its profit by charging merchant fees. This means that Klarna charges retail stores a certain interest when consumers use their BNPL option. The retail stores are willing to pay the interest mainly because the BNPL option allows businesses to increase their orders by 44% (e.g. conversion rate), and boost order volume by 68%.
More importantly, Klarna provides businesses secured payments as Klarna makes the payment to retail stores on behalf of the consumers even before the customers make their payment. This ensures the businesses to secure their sales, as well as saving them the hassle of the debt collection process.
How to use BNPL wisely?
- Set it and REMEMBER it
Set an automated reminder to remind yourself of your payment, and make sure you have enough money in the account before the due date.
- Keep track of your shopping
Many people make the mistake of purchasing goods that they usually cannot really afford using the BNPL scheme. This leads to losing track in budgeting, thus leading to overspending. Therefore, it is important to note the shopping you did with the BNPL scheme in a separate spreadsheet and constantly remind yourself not to overspend.
Buy Now Pay Later also may not be wise for those with limited cash flows and individuals with a fixed salary. With those who have various recurring expenses month to month, like rental and utility costs, adding another recurring transaction leaves less and less for one to not only invest, but save.
BNPL can be seen as a dual-edged sword, it can aid by providing room for your budget planning but it can also overload your budget before you know it! The best course of action with BNPL is to be mindful of your expenditures and keep track of your long-term expenses while keeping in mind that the possessions you acquired through BNPL are short-term liabilities that need to be paid off.
References
https://www.theweek.co.uk/business/economy/956431/the-pros-and-cons-of-buy-now-pay-later-schemes
https://www.thesundaily.my/home/dangers-of-easy-credit-options-FN9483531
https://productmint.com/the-klarna-business-model-how-does-klarna-make-money/
https://www.wsj.com/buyside/personal-finance/what-is-buy-now-pay-later-01659387924
https://www.propertyguru.com.my/property-guides/what-is-ctos-score-how-can-you-improve-it-16618
Researcher(s): Sherilynn Ngerng Siew Fong, Low Zhiyi
Reviewer(s): Muhammad Bahari, Emelia Anne
Editor: Emelia Anne
