These past few years have seen the exponential growth of the buy now, pay later (BNPL) arrangements, a trend that’s been fueled by the accelerated digital shift, and the surge in e-commerce activity. Now, that burgeoning industry is showing no signs of slowing down.

Bloomberg Intelligence senior industry analysts estimate that global sales using BNPL could top US$181 billion by 2022, up by more than 40% from US$93 billion in 2020.

This could push penetration to 4% of retail e-commerce versus just 1.6% in 2020, indicating that although BNPL options still account for a tiny portion of e-commerce sales, adoption is rising at a fast pace and that the growth opportunities are meaningful.

“BNPL is the new trend that we are seeing across the globe, and it is becoming very mainstream,” Chayan Hazra, Head of Payment Business – APAC, Pine Labs, a merchant commerce platform from India, said during Fintech Fireside Asia’s latest panel discussion.

“We are seeing a lot of new customer segments who were not into BNPL who are now taking it very enthusiastically … Even in developed markets where the penetration rate of credit cards is more than 100%, like Australia, Western Europe, [customers are] still [embracing BNPL].”

For consumers, the appeal of BNPL arrangements is obvious: users are able to buy what they need without having to shell out the entire cost upfront, and instead, pay in installments over a certain period of time.

These payment options are designed to be super convenient with streamlined sign-up and checkout processes to minimize friction. In Southeast Asia, where smartphone penetration is high and the population young, providing superior digital-first experiences has become an imperative for merchants.

“We deal with a generation where customers are using mobile-first as a way of consuming and purchasing goods, and must be able to provide that purchasing experience for them,” Trina Yeung, CFO, Atome Financial, a leading BNPL provider in Southeast Asia, said during the virtual panel discussion.

“From a customer perspective, it makes a lot of sense because it is convenient, it’s free, because it is funded by the merchants. Not only that, but it appeals to younger generations. Most of our customers are actually Gen Zs and Millennials who are more attune to purchasing using their mobile. Whether that’s online or offline, people still want to pick up their mobile phone, checkout and pay within seconds and have all that transaction history and data in one place.”

E-commerce reinvented

For merchants, benefits are also there and include higher conversion, higher basket size, and access to hyper-targeted marketing capabilities which allow them to reach the right consumers, said Marnix Zwart, Global Head, Partnerships, Standard Chartered Bank.

By leveraging the huge amount of data they collect from customers, BNPL providers are able to not only give merchants the ability to run marketing campaigns that are more effective, they also help customers to filter through the noise, really focusing on proposing the products that they like, increasing customer satisfaction.

All in all, these providers are reinventing online commerce by connecting frictionless payments with the online shopping experience.

“What BNPL providers have done is they’ve turned around the whole journey,” Chayan said. “They’ve taken the discovery to themselves to figure out which customers [the merchant is] targeting, what these customers need and what they’ll most likely shop, so it becomes very targeted offers to them … These platforms provide exactly the target that you are looking for, and make sure that the whole ecosystem and processes are very frictionless.”

This strategy has proven successful for many BNPL providers, allowing them to establish extensive commerce ecosystems.

“One of the trends we’ve found is that [BNPL platforms are more and more] turning into shopping apps, an [entire] environment,” Marnix said.

“Larger players like Klarna … are becoming sort of super apps now. That’s a very interesting trend because they can capture more and more consumers on their platform. It also opens up new revenue streams and other possibilities.”

Standard Chartered is part of a growing list of traditional financial players that are dipping their toes into BNPL. Recognizing the potential to reach new segments of customers, the bank announced in October 2021 a 10-year fintech partnership with Atome Financial which includes a US$ 500 million investment — the bank’s single largest fintech investment yet.

The partnership will first focus on delivering BNPL services across Southeast Asia, before eventually expanding that to other products and services, including banking, Marnix said. The two partners are now preparing to go live with a BNPL proposition in Malaysia.

“For us, they have a completely different profile of users that we normally have. It’s a segment which we want to do more but we don’t have the experience, knowledge and skill, and even the tech that Atome has,” he said.

“We believe that Atome, because of all its merchants and customers, is an ecosystem on its own, with a very rich knowledge and a lot of interactions … When we know these consumers, understand them well, it’s also an opportunity to introduce other products into the ecosystem.”

Harnessing data

BNPL players like Atome Financial are heavily reliant on data not just to offer a value proportion that both customers and merchants love, but also for credit decisioning and fraud.

At Mobilewalla, a provider of consumer data and intelligence solutions, more than a dozen of BNPL players now rely on the company’s data to assess customers’ default risk as well as in the debt collection process, said Anindya Datta, Founder, CEO, Chairman, Mobilewalla.

“We are providing predictive artifacts: data that are predictive of how likely somebody is going to default in a loan,” Anindya said. “We have found that across South Asia and Southeast Asia, the average value of handsets in a household is super indicative of how likely you are going to default in a loan.”

Other data and information including households characteristics and app engagement are also predictive of loan default likelihood, he said.

Using alternative data to help provide consumers with financing capabilities is particularly relevant in regions like South and Southeast Asia where credit footprints are limited.

Marnix noted that in markets including Vietnam and Indonesia, most people don’t have a traditional banking relationship. The cost of onboarding and the cost to serve these types of customers are just too expensive for banks to offer them traditional loans and credit cards, making BNPL an appealing alternative.