Debt and overspending are prevalent challenges for those embracing Buy Now, Pay Later schemes. However, with the right financial education, these services can be used smartly. — Image by zaozaa09 on Freepik
“I felt like my finances were spiralling out of control. I was using loans to pay off other loans.”
Opting for the alias Desmond, a 26-year-old digital marketing executive recounted his first few experiences using Buy Now, Pay Later (BNPL) services, which eventually landed him in over RM15,000 worth of debt within two months.
“It got so bad to the point that I resorted to applying for a credit card balance transfer to make sure I had enough cash flow to meet payment deadlines,” he added.
Desmond’s experience sheds light on the potential pitfalls and challenges users may face when venturing into the world of BNPL services, revealing how what seemed like a convenient solution could quickly transform into a slippery slope that contributes to unnecessary overspending.
BNPL services have emerged as a popular payment alternative that allows individuals to make immediate purchases while splitting payment amounts into smaller, more affordable instalments.
A report by Ken Research attributed the surge in Malaysia’s BNPL sector to the exponential growth in ecommerce during and after the pandemic, as well as the country’s young, tech-savvy and price-sensitive consumer demographic.
Seok says BNPL may appeal to those who have not qualified for traditional bank credit facilities as it may have more lenient approval criteria. — AMY SEOK
Amy Seok, the founding chairman of the Malaysia Literacy in Financial Education Association (MyLife), an organisation with a mission to enhance the financial literacy of Malaysians through education, explained that during the financial uncertainties of the pandemic, Buy Now, Pay Later (BNPL) services became a means to manage cash flow without the immediate burden of full payments.
“BNPL services can be seen as a modern alternative to traditional credit cards or post-paid utilities, providing a different avenue for consumers to access credit.
“The service may appeal to those who have not qualified for traditional bank credit facilities as it offers an alternative credit source with potentially more lenient approval criteria,” she added.
Sharing similar views on the matter, Emir Kamaruzzaman, a content creator who uses his platform, The Millennial Finance, to help simplify personal finance matters, stated that the barrier of entry for BNPL services is a lot lower compared to traditional lines of credit like credit cards.
Emir emphasised the potential for individuals to accrue debt when utilising BNPL services under unfavourable terms. — Emir Kamaruzzaman
“The fact that almost any Malaysian could get access to cheap credit to purchase things they otherwise couldn’t afford is a huge pull factor for BNPL services.
“The seamlessness of using such services on top of the attractiveness of lower monthly payments further drives their usage,” he added.
Illusion of affordability
While BNPL services do offer unprecedented ease of spending, consumers are finding it more challenging when it comes to monitoring their expenses amid the relentless pressure of pervasive advertising.
Easy accessibility to credit, coupled with impulsive spending habits, were the main reasons that led Desmond down the path of overspending, eventually spiralling into unsustainable debt.
“Seeing my purchase orders broken down into smaller payments made it feel like I wasn’t spending much at all.
“Paying only RM100 every month for the latest smartphone gives you an inflated sense of ego.
“The next thing you know, you find yourself owing thousands of ringgit to various vendors, all because the initial payment appeared manageable at the time,” he said.
According to Assoc Prof Dr Lai Chooi Seong, the associate dean of the Department of Social Science at Tunku Abdul Rahman University of Management and Technology, BNPL payments can provide the individual with a sense of immediate gratification by granting the individual access to desired products or services without requiring the full payment upfront.
Lai says BNPL provides a sense of immediate gratification by granting the individual access to desired products without requiring upfront payment. — LAI CHOOI SEONG
“Leveraging technology, social media tools, and seamless cross-border purchasing options, BNPL services have strategically employed psychological factors to motivate and stimulate consumer spending.
“The psychological desire for instant gratification, a powerful driver of consumer behaviour, is a key aspect of this strategy,” she added.
Dr Au Kah Mun, assistant professor at the University of Nottingham Malaysia’s faculty of social science, further elaborated on this point by emphasising that BNPL services also tend to create an illusion of enhanced affordability for goods.
She explained that although making such purchases does grant consumers a sense of comfort, it doesn’t equate to a rise in real income or increased purchasing power.
“Despite offering flexible payment options, goods remain costly, particularly in inflationary environments. This perceived flexibility cannot and should not be mistaken for augmented purchasing ability,” she said.
She added that the perception of affordability created by BNPL services can subconsciously confuse consumers, making it challenging for them to recognise their actual needs for specific goods.
Desmond added his debt situation got so bad that he resorted to applying for a credit card balance transfer to make sure he had enough cash flow to meet payment deadlines. — Unsplash
“Such confusion often prompts users to engage in overpurchasing, casting a shadow over their long-term financial strategies.
“When left unchecked, such habits can lead to reduced provisions for retirement or emergency funds, as well as hinder the ability to finance impending significant purchases, which ultimately foster a greater reliance on debts,” said Au.
Emir echoed similar concerns, emphasising the potential for individuals to accrue debt way beyond their means when utilising BNPL services under unfavourable terms.
“Taking on too much credit with poor financial knowledge can jeopardise your cash flow. While RM50 a month might seem affordable, it can and will stack up over multiple purchases,” he said.
Spending sparingly
On the flip side, a 29-year-old chemical engineer who only wanted to be known as Jane sees BNPL services as a valuable ally for managing unforeseen expenses, especially when immediate payments clash with budget constraints.
“For significant purchases like hotel bookings or furniture, I’ve turned to the BNPL option. The reassurance that I don’t need to amass a large sum of cash upfront is quite comforting,” she said.
She, however, emphasised that it is important to hold oneself accountable for maintaining a clear record of one’s BNPL transactions.
“Whenever I opt for BNPL services, I make it a point to keep track and set aside a certain amount for the upcoming payments.
“I find this method really helpful in preventing overspending while still enjoying the convenience of breaking down substantial purchases into more manageable amounts,” she added.
Au says buying via BNPL may grant consumers a sense of comfort, but it doesn't equate to a rise in real purchasing power. — AU KAH MUN
Au pointed out that BNPL payments can be advantageous if consumers remain responsible while staying within their financial means, noting that “it offers a convenient way to temporarily free up cash, but this should not be taken for granted”.
“For consumers, establishing a spending plan while keeping a record of all expenses is crucial.
“Allocating at least 20% of their income towards savings and investments can ensure the fulfilment of both immediate and long-term financial goals while staying within their financial capacity,” she said.
According to Emir, users need to set a realistic budget for their shopping needs while regularly assessing their financial situation before opting for BNPL services.
“You have to ask yourself why you are making the purchase in the first place. If it’s a discretionary spend on an item you don’t truly need, you shouldn’t buy it if you can’t afford it upfront.
“The rule of thumb I always use is that if I can’t buy two of them, I can’t afford it,” he added.
The idea behind this rule is that if you cannot comfortably afford to purchase two of a particular item or service without straining your budget, then it might be an indication that the purchase is beyond your current financial means.
Call for closer control
As Phase 1 of the Consumer Credit Act (CCA) looms on the horizon, promising proper regulation for non-bank credit providers, it signals a crucial step in regulating various financial activities, including the burgeoning BNPL sector.
Lai emphasised the need for the government to take on a balanced approach in order to promote responsible financial behaviour, safeguard consumers, and encourage financial inclusion.
“Regulations play a key role in maintaining transparency by outlining terms, fees, and conditions while preventing any unfair or deceptive practices that may adversely affect consumers.
“Achieving a balanced approach is vital for promoting responsible financial behaviour, safeguarding consumers, and encouraging financial inclusion,” she added.
Seok observed that the formulation of the CCA, phase 1 of which is scheduled for 2024-2025, suggests an ongoing effort by the government to regulate consumer credit.
She stressed the importance of effective regulation to ensure that only licensed digital bankers or financial institutions offer BNPL services, stating that “adequate regulations are crucial in safeguarding consumer interests, ensuring fair practices, and maintaining the stability of the financial system”.
“Proper regulation can provide a framework for responsible lending, transparent disclosure of terms, and mechanisms to address consumer complaints, ultimately benefiting consumers by promoting a fair and secure financial environment.
“The absence of such regulations could pose risks to consumers, making it imperative for the regulatory landscape to evolve and address the challenges associated with BNPL services,” she said.
Before the regulatory framework is unveiled, Seok urges consumers to adopt a cautious stance on BNPL services, citing challenges related to consumer understanding and financial education that still need addressing.
“The effectiveness of BNPL services is contingent on the strength of the financial education system. There is a need for a robust financial education infrastructure to ensure responsible and informed use of these services,” said Seok.
Emir echoed similar sentiments, suggesting that BNPL payments can be beneficial for users in becoming more mindful and aware of their spending habits when used responsibly.
“To me, credit is just a tool that is up to us on how we want to use it. I’m a huge fan of credit cards, and I use them almost exclusively for all of my expenses.
“Credit is a very useful tool to have in your financial kit as long as you know how to use it responsibly, and BNPL isn’t an exception,” he concluded.
