'BUY NOW, PAY LATER' ONLINE SCHEMES ARE INEVITABLE DEBT TRAPS, SAYS EXPERT

The influx of mobile platforms providing buy now, pay later services is putting consumers, particularly the younger segment, at risk of piling up debts which, eventually, may lead them to bankruptcy. This is the first of two articles on this issue.

KUALA LUMPUR (Bernama) – These days, buy now, pay later (BNPL) services are a dime a dozen online and fast gaining ground among consumers – the younger segment in particular – with a host of mobile applications to that effect readily available for downloading.

As implied by the “buy now, pay later” slogan, consumers can buy goods and services without making any payment first. The procedure for doing so is as easy as ABC – only their identity card and facial recognition are needed for registration purposes and 10 minutes later, they can start shopping.    

Beware, though, as nothing worth having comes easy. According to experts, these BNPL schemes run the risk of dragging buyers into getting entangled in debt traps.

Said Putra Business School economic analyst Associate Prof Dr Ahmed Razman Abdul Latiff: “I find this BNPL worrying because (currently) it is not regulated by Bank Negara Malaysia (BNM), thus making it easy for people to get into debt, especially those who have no knowledge of financial management.”

Assoc Prof Dr Ahmed Razman Abdul Latiff. putrabusinessschool.edu.my

He told Bernama what makes BNPL attractive is that there is no limit to how much a person can spend and their credit score is not affected even if they default on payments.

“Even if a buyer has an outstanding debt with a BNPL provider, they are free to rack up debts with other BNPL providers because there is no record (of their outstanding payments). This puts them at risk of getting caught in a debt trap,” he warned.

There are statistics to prove that this academic’s warning is not without foundation. According to media reports, the BNPL market transaction value, involving 10 non-banking BNPL providers, surged to RM1.49 billion in 2021 compared with only RM55 million the previous year.

A FORM OF PERSONAL LOAN

To find out if shopping using the BNPL platform is as simple as it is made out to be, this writer himself decided to give it a try. Indeed, carrying out transactions was not only a breeze but exciting as well, what with all those discounts and promotions offered to buyers.

The sales pitch was so enticing that even this writer was hooked and the best part was that the payment could be settled in instalments. He purchased a tablet keyboard costing RM299 and was offered a discount of RM25, and his monthly instalments came to RM68.50 for four months.

Ahmed Razman viewed this transaction strategy as a form of personal loan.

“The traders see this (BNPL) as a way to make it easier for people to buy things because not all of them (customers) have a credit card.

 “So, the merchants started making use of the BNPL (strategy), which means that buyers have the option to buy on credit using BNPL even without having a credit card,” he said.

ZERO INTEREST?

A check by Bernama revealed that most BNPL providers claim their transactions are interest-free. But is this true?

Based on Bernama’s observations of 10 BNPL providers, eight of them are known to have “hidden interest charges” that are imposed on customers who fail to make their payments on time.

This was also acknowledged by financial expert Dr Adam Zubir through his YouTube account. He said BNPL is a business concept that makes a profit through the imposition of processing and late payment charges.

Meanwhile, when asked if BNPL can cause a person to plunge into bankruptcy, Ahmed Razman said it can potentially lead an individual in that direction if they fail to monitor their financial status.  

“BNPL itself will not make a person go bankrupt but the risk of them heading towards that direction exists if their (overall) debt commitments increase and they are unable to settle their monthly car and housing loans and credit card bills.

“Initially, a person’s debt commitments with banks may be low but it will become problematic when they spend extravagantly and start piling up their debts through BNPL. This is the problem facing the young generation now,” he said.

In June, Prime Minister Datuk Seri Ismail Sabri Yaakob expressed his concern over the increase in the number of bankrupts among youths.

Malaysian Department of Insolvency data showed that nearly 60 per cent (about 22,000) of the 46,132 Malaysians involved in bankruptcy cases from 2018 to May this year were aged between 25 and 44, with 19,334 of them citing personal loans as a factor leading to bankruptcy.

LOW FINANCIAL LITERACY

One of the reasons youths get caught in the debt trap is their low level of financial literacy, a fact which is supported by an Organisation for Economic Cooperation and Development (OECD) report stating that only 33 percent of Malaysians possess financial knowledge.

“How many people plan their spending based on the income earned every month? For as long as we don’t monitor our personal finances, we would be spending (freely), including using BNPL,” commented Ahmed Razman.

He also warned that BNPL may worsen Malaysia’s household debt problem. The nation’s household debt-to-gross domestic product (GDP) ratio stood at 89 percent as of December 2021, which is the highest in Southeast Asia and second-highest in Asia after South Korea.

“Malaysia’s household debt rose from RM1.27 trillion to RM1.34 trillion; indirectly, the nation’s household debt is higher than the federal government debt.

“This issue (BNPL) is very dangerous as it can make the debt situation worse for a person who is already tied to car and housing loans, credit card payments and personal loans,” he added.

Ahmed Razman urged BNPL operators to clearly explain the nature of the transactions so that their customers are aware of the risks they would have to face.

“In fact, I wish they (operators) would display a warning before the customer clicks on the ‘agree’ button to use the BNPL system,” he said.

Meanwhile, BNM’s Credit Counselling and Debt Management Agency (AKPK) said a survey among participants of its counselling programme found that their high level of indebtedness was attributed to the cost of living (37 percent) and weak financial planning (36 percent).

In a statement to Bernama, AKPK said the debt problem was worsened by the attitude of consumers who lived beyond their means so that they could follow the latest trends and satisfy their desires.

Translated by Rema Nambiar