The costs and benefits of buy now, pay later

Financial experts have cautioned against the unthinking use of payment methods such as the buy now, pay later (BNPL) scheme as the festive season kicks in and online shopping platforms ramp up their year-end sales with massive discounts and offers, saying this could lead to the rapid accumulation of debt.

Online shopping came into its own during the pandemic when measures to curb the spread of the virus saw the closure of many physical premises. But even before that, it had already been gaining traction with rebates and vouchers dangled for customers at every possible occasion.

Now, with the BNPL scheme entering the picture, financial experts say it may become even easier for shoppers to get what they want with just a click of the mouse.

As the name suggests, the BNPL method allows customers to obtain an item without making full payment up front.

Similar to conventional instalment schemes, payment is instead broken down into smaller sums to be paid over a certain period of time. BNPL is usually interest-free but late payment fees are charged if customers fail to make the required payment on time.

In Malaysia, the scheme is offered by platforms such as Grab through its PayLater option, Shopee through SPay Later, Atome and Hoolah.

It is currently unregulated although Bank Negara Malaysia announced last month that interagency efforts would be made to enact the Consumer Credit Act next year, thereby strengthening regulatory arrangements for consumer credit activities including BNPL schemes.

For now, though, BNPL is rapidly gaining ground as one of the fastest growing payment methods for cashless transactions.

Speaking to MalaysiaNow, though, iMoney CEO See Wai Hun said certain issues should be kept in mind, including the matter of late payment fees.

“Late payment charges can range from a fixed amount such as RM60 to a percentage of the price of the item per month,” she said.

As BNPL breaks purchases down into smaller instalment amounts, she added, it could also create the illusion of items being “more affordable” than they actually are.

“This misperception may lead some to commit to purchases that are in reality beyond their financial means,” she said.

BNPL is also more accessible with a lower entry barrier than credit cards and bank loans. In Malaysia, basic requirements include proof that the customer is at least 18 years old, evidence of citizenship, a debit card, phone number and email address.

See said the ease of access could also shorten the decision time between consideration and purchase, leading to the possibility of impulsive buys.

Amanda Yeo, a research analyst with think tank Emir Research, said BNPL is particularly attractive to millennials and the so-called Gen Z as it allows them to purchase all manner of items from cosmetics and clothing to electronics and even furniture within their monthly budgets.

“As payment can be divided across several months, they feel less financially burdened during the pandemic time,” she added.

The “feel good” impact of BNPL is also compounded by the absence of physical receipts and transactions, which with conventional purchases are tangible reminders of the money spent.

This is why some financial advisers encourage people to spend with cash instead of a credit card, so that they will be more conscious of the cash going out, Yeo said.

If customers should default on their payments, she said, BNPL companies might eventually notify the debt collectors. This is where the concern lies, she added.

According to the Credit Counselling and Debt Management Agency, credit cards and personal loans are the main reasons why many Malaysians become trapped in debt.

In Malaysia, household debt rose from RM1.27 trillion in 2020 to RM1.34 trillion as of June.

“Households have to prioritise what to spend on first and what items they require the most,” Yeo said.

But this is not to vilify such schemes.

Purchases made through BNPL could help repair some of the economic damage left by the pandemic, which wreaked havoc on countries throughout the world.

And if used wisely, the method allows customers to obtain much-needed items without harming their cash flow, See said.

Customers may even be able to save through the various rewards, promotions and points offered by e-commerce sites.

But this must be coupled with financial discipline and awareness.

Yeo meanwhile advised young buyers to adjust their lifestyle expectations and to opt for more affordable products based on their budget constraints.

“At the end of the day, when needs are simpler, life will not be suffocating,” she said.