Introduction

Purchasing items on credit is not a new idea, with its origins dating back to around 5,000 years ago in ancient Mesopotamia. In our modern context, there are a variety of consumer credit instruments available. These include short term and “payday” loans, 0% instalment plans and overdrafts offered by banks and lines of credit offered by merchants, not forgetting the most prolific form of purchasing on credit – the ubiquitous credit card. It was reported by ValueChampion (from data collected from the Department of Statistics of Singapore up to 31 December 2017) that the total outstanding Singaporean consumer debt lies at around S$323 billion and the mean credit card debt of Singaporean households is approximately S$1,956. While a recent report by the Straits Times highlights that credit card debt is down, personal debt has increased, with borrowing up sharply among young people. It should therefore come as no surprise that the government has begun to assess if some form of regulation over Buy Now, Pay Later (BNPL) schemes is needed.

BNPL Schemes

Over the past few years, there has been an increase in the number of merchants partnering with start-ups and fintech companies offering a new method of payment known as the BNPL scheme. BNPL schemes typically allow consumers to pay for an item over a short period of time, in monthly instalments, without the need to incur interest charges or fees. Unlike other 0% instalment plans, BNPL schemes do not typically require the purchaser to have a credit card (or a good credit score, for that matter) and are not restricted to the purchase of larger, more expensive items. BNPL schemes can be used for the purchase of smaller items, such as cosmetic goods and apparel, depending on the merchant’s partnership with the BNPL provider.

The COVID-19 pandemic has accelerated the rate of adoption of innovative digital solutions, including the use of BNPL schemes. Just to have a sense of the scale of this growth, Affirm (NASDAQ: AFRM), a leading U.S.-based BNPL provider, has more than tripled its revenue from US$264.4 million in 2019 to US$870.5 million in 2021. Here in Singapore, as e-commerce has also become more prevalent, there has been a growing number of non-bank start-ups offering BNPL services, such as Grab PayLater, Atome, Hoolah and Rely. These BNPL providers offer the ability for consumers to purchase items and make payment in instalments 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 that they partner with. Consumers can even get bonuses and cashback when making their first purchase using a BNPL scheme, and even merchant-specific vouchers as they continue to shop with the BNPL provider.

While this seems like a useful way for consumers to spread the costs of their shopping and manage their personal cash flow, there are late payment fees to be aware of when using a BNPL scheme. Where the consumer fails to make an instalment payment on the agreed date, the late payment fee can range from S$5 for each missed payment to anywhere up to S$40 and beyond (depending on the initial order value).

MAS’ current stance on BNPL schemes

In a recent Reply to Parliamentary Question, Senior Minister and Minister in charge of the Monetary Authority of Singapore (MAS), Mr Tharman Shanmugaratnam, stated that BNPL schemes “do not pose significant risk to household indebtedness”. This is because they are currently not widely used relative to other payment methods, with the total value of BNPL transactions in 2020 being around S$114 million out of the S$92 billion in credit and debit card payments over the same period.

The Senior Minister continued by highlighting that BNPL schemes do not charge compounding interest on the outstanding amount and BNPL users’ accounts will typically be suspended by the BNPL provider (i.e. no further use of that BNPL scheme) once a payment is overdue. Nevertheless, the Senior Minister stated that MAS was “assessing whether a regulatory framework is necessary to guide the evolution of BNPL schemes as they become more widely used in Singapore”. BNPL schemes may be required in the future to adopt fair dealing practices, and, as noted by the Senior Minister, provide clear disclosure of the late fees chargeable at the point of account opening, to ensure that consumers are fully aware of the consequences of not paying on time.

Closing thoughts

As more and more BNPL providers enter the field and larger numbers of consumers choose to use BNPL schemes for their day-to-day purchases, there will be a better understanding of the impact of such schemes on Singapore’s household debt. With global household debt generally seeing an increase during the COVID-19 pandemic, this space will likely be watched closely by consumers and regulators alike.