‘Buy now, pay later’ can bring more people into the financial system

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By Lotte Schou-Zibell, Sarah Corley

The popular instant credit system could be a powerful tool to help Asia’s ‘unbanked’ establish credit, open bank accounts, and otherwise reap the benefits of the formal financial system.

The ‘buy now, pay later’ payment process that boomed during the pandemic is now being seen in a new light: as a way to bring millions of people around the globe into the financial system.

‘Buy now, pay later’ allows consumers to purchase goods and receive them immediately but pay for them later via a series of usually interest-free instalments. Properly managed and targeted, it could be a tool to increase financial inclusion in developing countries as it provides a credit option for many, particularly people with limited or no access to financial services or who lack credit history.

‘Buy now, pay later’ exploded in popularity during the pandemic as shopping habits shifted online. Fintechs such as Affirm, Klarna, Afterpay, and Paypay are big names in the industry, with Apple set to join. ‘Buy now, pay later’ amounted to about 2.9 per cent of global e-commerce transaction value in 2021, and is expected to increase to 5.3 per cent by 2025, according to Worldpay.

Nonetheless, some ‘buy now, pay later’ providers are facing tightening rules. Safaricom, for example, had unveiled plans to partner with Equity Bank to provide a zero-interest credit service to allow millions of customers to shop for goods up to 100,000 Kenyan shillings and pay later. But the product is currently on hold pending regulatory review from the Central Bank of Kenya.

‘Buy now, pay later’ has also caught the eye of the Reserve Bank of India, where it is the fastest-growing online payment method, according to financial technology company FIS. Newly released digital payment guidelines that aim to ensure orderly growth and protect borrowers are ‘based on the principle that lending business can be carried out only by entities that are either regulated by the central bank or entities permitted to do so under any other law.”

Yet, ‘buy now, pay later’ still offers financial inclusion possibilities that make it worth watching as a potential way of improving access to finance in poor communities. Limited credit checks are completed on the individual, so having no credit history or a poor one, is no longer a barrier.

The approval criteria vary, but more people are eligible for ‘buy now, pay later’ than the traditional loans and credit cards. ‘Buy now, pay later’ providers can lend small amounts and build up based on the repayments and history they create with their consumers. And the approval process is quick, which makes it more attractive to those unfamiliar with formal banking processes.

‘Buy now, pay later’ can also generate financial inclusion opportunities by providing access to e-commerce to those without a digital account/e-wallet, and make it easier to make large purchases, such as solar panels and refrigerators. Due to its use of technology, it appeals to youth, who might not be eligible for traditional credit.

It can also provide small businesses with the opportunity to increase stock/products and pay back over time, enabling business growth and revenue generation. The ‘buy now, pay later’ apps can also provide consumers with financial education information, encouraging responsible lending practices and greater knowledge and awareness among consumers.

And if the ‘buy now, pay later’ provider reports to credit bureaus, that credit history can be passed to other financial service providers, opening up access to a broader range of financial products and services for the consumer.

If managed correctly, ‘buy now pay later’ can disrupt the traditional credit industry and bring more people into the financial system. This is particularly so in developing countries, where credit card penetration is minimal.

Concerns do exist. Consumer protection and indebtedness are significant issues, for example.

Some consumers may not see ‘buy now, pay later’ as a line of credit. They may not assess their purchase decision with sufficient scrutiny. The soft credit checks completed may result in consumers being allowed to borrow more than they can afford to pay, or in countries with several ‘buy now, pay later’ providers, consumers can quickly amass large debts across multiple providers.

Although ‘buy now pay later’ is interest-free, late or missed payments can incur fees that can quickly add to debt. Over-indebtedness could then become a challenging issue, particularly for vulnerable and low-income individuals, resulting in financial exclusion. 

Clearly, to support financial inclusion, there needs to be a balance between risk and reach. ‘Buy now, pay later’ should enable innovation while ensuring stability, consumer protection, and competition. Governments need to enable current ‘buy now, pay later’ providers and allow new entrants, with a particular focus on the situation of low-income earners and those without access to existing credit services.

Ways to achieve this, include to focus on financial inclusion in the design, marketing, and distribution of ‘buy now, pay later’ products or services. Clear, transparent information to those outside the financial system is also needed, while support and advice is provided to those struggling with payments.

There are risks to the use of ‘buy now, pay later’ credit in developing countries, but the right regulatory framework, and a focus on financial inclusion, could make it a game-changer for poor communities over the long term.

Lotte Schou-Zibell provides technical leadership for innovative approaches to inclusive finance, finance sector development, and infrastructure finance; and on One ADB approach to projects.

Sarah Corley is also the Divisional Director at Digital Frontiers where she heads the Community and Professional Development Division of ADB.