Woman shopping online.
Oscar Wong | Moment | Getty Images
China’s buy-now-pay-later market is expected to grow – but the industry is still in its infancy and challenges lie ahead, experts told CNBC.
Interest in BNPL services in China has increased over the past decade, said Kapil Tuli, a marketing professor at the Lee Kong Chian School of Business at Singapore Management University (SMU).
Buy Now Pay Later Services are a form of payment in which consumers make purchases and pay them off in several installments, often interest-free, over a certain period of time. While BNPL is typically interest-free, some providers charge high late fees.
According to Tuli, a number of factors are fueling the “perfect storm” for the growing trend. These include unprecedented low interest rates, the increase in online payments through “super apps” such as Alipay and WeChat, and fintech start-ups with strong financial resources that want to win new customers.
In addition, China’s cashless society, huge e-commerce market, and mobile and online shopping have become ubiquitous in China, said Boh Wai Fong, vice dean of Nanyang Business School at Nanyang Technological University in Singapore.
The Chinese BNPL sector has become one of the fastest growing markets in the Asia-Pacific region, according to a survey by research and consulting company PayNXT360.
According to the BNPL survey for the second quarter of 2021, BNPL payments in the country are expected to increase 51.3% annually and could reach $ 82.78 billion in 2021.
The rise in online shopping and the “seamless integration” of BNPL payments with e-commerce platforms have resulted in more buying decisions, Boh said.
In 2020, according to a survey by the Payment and Clearing Association of China, about 74% of Chinese people used mobile payments on a daily basis because of their simplicity and convenience.
Tech-savvy Chinese millennials are also jumping on the bandwagon to satisfy their hunger for the latest gadgets and luxury goods, research shows.
According to a study by the Academic Center for China’s Economic Practice and Thinking at Tsinghua University, people between the ages of 18 and 29 make up 36% of consumer finance borrowers, excluding home loans.
However, critics have warned that the trend may encourage excessive spending habits. A UK consumer protection group conducted a study and found that almost a quarter of BNPL users spend more than planned because the service was available.
With Covid-19 impacting household incomes, Chinese households and consumers could use BNPL as an option to “smooth out” their spending on large items over the long term, Boh said.
The growth of BNPL is “inevitable,” said the professor, who pointed out that the e-commerce and mobile payment industry in China, unlike other markets, is already “very stable” and from several big players such as Alibaba and Tencent will be dominated. That means new players like international companies may have limited opportunities to enter the Chinese market, she said.
One of the most popular players in China was Ant Group’s microlending business, Ant Check Later. Alipay, also known as Huabei, enables Alipay users to make online and offline purchases without a credit card, with options to repay in installments.
Icons of Buy Now Pay Later (BNPL) apps are arranged clockwise from top left in Singapore on Sunday June 6, 2021, Pace, Rely, Octifi, Atome, Grab and Hoolah
Wei Leng Tay | Bloomberg | Getty Images
New player targets China
One BNPL player targeting China is Atome, a fast-growing start-up headquartered in Singapore.
The financial technology company operates in nine markets including Singapore, Indonesia, Vietnam, the Philippines and mainland China. It has over 20 million registered customers in Asia as part of its parent company, Advance Intelligence Group.
While it appeals to young professionals between their early 20s and late 30s, the company also sees a race to catch up in older segments like those over 40, who appreciate the “convenience, transparency and flexibility” of BNPL, says Tongtong Li, said the general manager of Atome China emailed CNBC.
BNPL is still at a relatively early stage in mainland China, but we expect strong medium to long-term growth for the industry.
General Manager, Atoms China
Since launching in mainland China in September 2020, the business has “expanded rapidly” to cover tier 1 megacities and smaller tier 2 cities in regions like Chongqing, Chengdu and Luzhou, Li said.
It has also expanded to include a dealer network of 1,500 local and international brands such as Nike, New Balance and Tissot. Li said consumers spend between 1,000 and 1,500 Chinese yuan (about $ 157 to $ 235) per transaction on beauty, fashion, makeup, and skin care products. She added that they are also seeing growing momentum in the luxury fashion category.
Big banks also throw their weight behind BNPL firms.
Atome Financial, the division that operates Atome and its digital credit platform, has partnered with Standard Charted for 10 years. The partnership includes $ 500 million to fund and collaborate on co-branded products in multiple markets in Asia.
“BNPL is still at a relatively early stage in mainland China, but we expect strong medium to long-term growth for the industry,” said Li.
She said Atome will continue to expand into additional Tier 1 and Tier 2 cities given the “great potential”, adding that the company could leverage its regional market presence to drive more cross-border transactions between Southeast Asia and mainland China .
China is taking action
Since the end of last year, the Chinese regulators have expanded their regulatory action against China’s so-called “platform economy”, which covers a range of e-commerce sectors from online shopping to food deliveries to fintech.
The buy-now-pay-later practice “encourages spending and sometimes triggers what is considered excessive spending,” said Ruan Tianyue, assistant professor in the Department of Finance at the National University of Singapore Business School.
As with other forms of consumer credit, a fraction of the BNPL balances may need to be declared as a bad loan if the borrower defaults or is late with a payment. “Too high a level of non-performing loans can jeopardize economic and financial stability,” she said.
NTU’s Boh pointed out that BNPL programs were “relatively new” in China. The regulatory framework and industry guidelines are not yet mature, so it is important to further develop the system, she added.
SMU’s Tuli agreed, saying that while BNPL has become a popular and viable option for Chinese consumers struggling to access credit cards, the sector is likely to see “more measured, underrated” market growth in the near future.
“In the last six months, the growth craze in China has now calmed down. The Chinese supervisory authorities are very sensitive. ” [about] anything that is likely to pose systemic risk to the financial systems, “said Tuli.
“Going forward, companies need to be careful how they attract consumers … I don’t expect wild west growth like we’ve seen before,” he said, referring to the promising growth of the BNPL sector before the tech crackdown.
– Correction: This article has been updated to accurately reflect that Huabei is still operational.