Private banking

The Long and Short of Taking Longer to Pay – Buy Now, Pay Later Dentons

introduction

Buying items on credit is not a new idea, its origins stretching back some 5,000 years to ancient Mesopotamia. In our modern context, there are a variety of consumer credit instruments available. These include short-term and “payday” loans, 0% payment plans and overdrafts offered by banks and lines of credit offered by merchants, not to mention the most prolific form of purchase. on credit – the ubiquitous credit card. It has been reported by ValueChampion (from data collected from the Singapore Department of Statistics up to December 31, 2017) that the total outstanding debt of Singaporean consumers stands at approximately S $ 323 billion and that the Average Singaporean household credit card debt is around S $ 1,956. While a recent Straits Times report points out that credit card debt is on the decline, personal debt has increased, with a surge in borrowing among young people. It is therefore not surprising that the government has started to assess whether some form of regulation of Buy Now, Pay Later (BNPL) programs is necessary.

BNPL schemes

In recent years, there has been an increase in the number of partner merchants of start-ups and fintech companies offering a new payment method known as the BNPL scheme. BNPL programs typically allow consumers to pay for an item in a short period of time, in monthly installments, without having to pay interest or fees. Unlike other 0% installment plans, BNPL programs generally do not require the buyer to have a credit card (or a good credit rating, for that matter) and are not limited to purchasing larger and more expensive items. BNPL programs can be used for the purchase of small items, such as cosmetics and clothing, depending on the merchant’s partnership with the BNPL supplier.

The COVID-19 pandemic has accelerated the rate of adoption of innovative digital solutions, including the use of BNPL programs. Just to get a feel for the scale of this growth, Affirm (NASDAQ: AFRM), a leading US-based BNPL supplier, more than tripled its revenue to $ 264.4 million. US $ 870.5 million in 2019 to US $ 870.5 million in 2021. Here in Singapore, e-commerce has also become more prevalent, with a growing number of non-bank start-ups offering BNPL services, such as Grab PayLater, Atom , Hoolah and Rely. These BNPL providers provide consumers with the ability to purchase items and make payments in installments over an agreed period of time with no interest charges or transaction and processing fees to pay. Instead, these companies make their money by charging transaction fees to the merchants they partner with. Consumers can even get bonuses and cash back on their first purchase using a BNPL program, and even merchant specific vouchers when they continue to shop with the BNPL provider.

While this appears to be a useful way for consumers to spread the costs of their purchases and manage their personal cash flow, there are late payment fees to consider when using a BNPL system. When the consumer fails to make a payment in installments by the agreed date, late payment fees can range from S $ 5 for each missed payment to anywhere up to S $ 40 and beyond (depending on the value of the initial order).

Current position of MAS on BNPL devices

In a recent response to a parliamentary question, the Chief Minister and Minister responsible for the Monetary Authority of Singapore (MAS), Mr. Tharman Shanmugaratnam, said that BNPL programs “do not pose a significant risk to the indebtedness of households ”. This is because they are currently not widely used compared to other payment methods, with the total value of BNPL transactions in 2020 being around S $ 114 million out of S $ 92 billion in credit card payments and payments. debit during the same period.

The Senior Minister went on to point out that BNPL schemes do not charge compound interest on the unpaid amount and that BNPL users’ accounts will generally be suspended by the BNPL provider (i.e. without further use of this scheme. BNPL) once a payment is overdue. Nonetheless, the senior minister said the MAS “is assessing whether a regulatory framework is needed to guide the evolution of BNPL schemes as they become increasingly used in Singapore.” BNPL’s systems may be required in the future to adopt fair dealing practices and, as noted by the Chief Minister, to provide clear disclosure of late fees due at the time of account opening, to ensure that consumers are fully aware of the consequences of not paying on time.

Closing thoughts

As more BNPL providers enter the field and more consumers choose to use BNPL programs for their daily purchases, the impact of these programs on household debt Singaporeans will be better understood. With global household debt typically on the rise during the COVID-19 pandemic, this space will likely be watched closely by consumers and regulators.