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Three Key Strategies for BNPL in Emerging Markets in Southeast Asia

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Arshad Mawla Bio

Since its launch in Southeast Asia in 2018, Buy Now Pay Later (BNPL) has experienced a notable surge in popularity, providing consumers with a convenient and accessible alternative to traditional financial services. This service enables consumers to defer payment for their purchases, typically opting for instalment-based repayment options instead of immediate full payment. As a result, BNPL has found fertile ground in Southeast Asia, implementing three key strategies, namely expansion by partnerships, redefining the business model, and establishing an ecosystem.

Southeast Asia presents an excellent opportunity with huge underserved populations

Southeast Asia markets such as Indonesia, Malaysia, the Philippines, Thailand, and Vietnam present promising opportunities for BNPL providers to expand their operations due to the substantial number of unbanked and underserved individuals.

The Philippines and Indonesia have percentages of unbanked and underserved populations of 76% and 67%, while Vietnam, Malaysia and Thailand follow closely behind with 47%, 40% and 25%, respectively

Source: Euromonitor International 

These figures highlight the considerable potential for reaching underserved populations in these markets and promoting greater financial inclusivity.Chart showing Market Size of BNPL in Southeast AsiaExpansion by partnerships

Given that BNPL is a relatively new offering tapping into the market, the primary focus for businesses entering this sector is to implement expansion strategies that will drive adoption and attract a large user base. Among these strategies, partnerships with other players in the industry have proven to be crucial for BNPL players to expand the usage and adoption of their services. By cooperating with card operators, e-commerce platforms, digital wallets, and insurance companies, BNPL can swiftly extend its reach, enhance user engagement, and capitalise on revenue opportunities.

For instance, Atome Philippines has forged a partnership with Mastercard, enabling their users to leverage BNPL services not only with their existing merchant partners but also with millions of Mastercard's global partners. Similarly, Traveloka PayLater in Indonesia initially introduced its Pay Later functionality within its online travel agency (OTA) platform. However, it later expanded its BNPL offering by collaborating with Bank BRI and Visa to introduce the Pay Later card, facilitating the use of its BNPL services with any physical or online Visa partner worldwide.

Such collaborative partnerships have emerged as highly effective means for BNPL players to broaden their customer base and increase service usage.

Redefining the business model

The BNPL model relies solely on revenue from partner merchants and charges consumers minimally, which has presented challenges in terms of sustainable revenue generation and long-term profitability for many BNPL players. To address this, BNPL business models have undergone significant transformations aimed at enhancing revenue streams and overall profitability. In response, numerous BNPL players have implemented diverse consumer charges such as conversion fees, handling fees, or subscription fees as additional revenue sources that contribute to the financial viability of BNPL services.

Furthermore, to optimise revenue and operational efficiency, many players have adopted shorter instalment periods or repayment terms. This shift involves transitioning from the conventional monthly instalment structure, typically spanning 4-6 months, to fortnightly instalments over a shorter duration. By reducing the lending period, BNPL providers are able to generate higher revenue through more frequent lending cycles while maintaining similar borrowing costs. This optimisation strategy allows them to maximise earnings and operational efficiency.

Establishing an ecosystem

Rising inflation and interest rate hikes have presented significant challenges for many BNPL players. These circumstances have considerably elevated the cost of borrowing, thereby making it increasingly difficult for players in the industry to achieve profitability. In response, leading players have started adopting their own source of funds, either by acquiring banks or by operating as digital banks themselves. By doing so, they will gain access to deposits and will be able to use those funds in their BNPL operations, which will be a cheaper source of funds compared to relying solely on borrowing from traditional banks or investors.

To address this issue, leading BNPL players have embarked on strategic initiatives to secure their own sources of funding. One approach entails acquiring banks or transitioning into digital banking operations. For instance, Kredivo Indonesia acquired Bank Bisnis and rebranded it into a digital bank, Krom Bank. Similarly, Akulaku Indonesia has acquired Bank Neo Commerce, gaining over 10 million account holders.

By taking these steps, these players gain access to deposits, which can be utilised as a more cost-effective source of funds for their BNPL operations. This approach offers a viable alternative to relying solely on borrowing from traditional banks or seeking investment from external sources. This strategic shift allows them to mitigate the financial burden posed by inflation and interest rate hikes, enhance profitability, and ensure greater financial resilience in an evolving economic environment.

Opportunities and challenges

The absence of well-defined practices and regulations in emerging markets poses significant challenges and uncertainties for BNPL players. In recent years, many BNPL providers have faced significant challenges related to credit risk. This is primarily because BNPL users tend to be younger and may have less familiarity with financial products.

However, this unique environment also offers opportunities for development that are not readily available in markets with extensive regulatory frameworks. Remarkably, substantial portions of the unbanked and underserved populations in these emerging markets are increasingly embracing BNPL as their primary financial solution. As a result, there is a strong likelihood that BNPL could emerge as the principal provider of financial products and services in these markets in the future.

This evolving landscape calls for strategic foresight and adaptability from BNPL players as they navigate through the uncertainties. By understanding these markets’ unique needs and preferences, BNPL players can position themselves as pioneers in shaping the financial landscape, fostering financial inclusion, and capitalising on the immense growth potential that emerges from these promising markets.Chart showing Segmentation by Banking Service Coverage Across Key Southeast Asia Markets, 2023

Learn more about fintech trends in our report, Disruptive Trends in Digital Banks in Asia Pacific and Australasia – II: Market Landscape, for more analysis on the drivers of digital banks in Asia Pacific.

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