The Tech Tech Fintech event is an exploration of the technological forces shaping the future of finance. For this event, we have invited Connie Ren, co-Founder & Chief Marketing Officer of Tanggram Australia & Vivian Zhou, co-founder & Chief Product Officer of Karlsgate. In this blog, we aim to provide some of the speaker’s key insights surrounding the paradigm shifts influencing, or set to influence, the Fintech Industry.
Along with this, this blog will further explore BNPL on buyers at a micro-scale, the transformations BNPL impose on other industries from a macro perspective, as well as an analysis of the current regulations of the BNPL industry and how changes in regulations might affect the industry in the future.
Overview of Paradigm Shifts
Paradigm Shift 1: Consumer Data
Consumer data can be broadly divided into two main categories, personal identifying data and behavioural data. Personal identifying data refers to your name, date of birth, gender, etc, whereas behavioural data refers to your transactions, credit history, shopping behaviour, etc. Working with Consumer Data is a broad topic that includes multiple trends, including regulations about the collection, usage and privacy, digital ID, lateral consumer data and data analytics. Below are the speaker’s key insights during the event:
► With the help of technology, we can enhance for better data collection and analysis through the provision of quicker and more tailored user experiences, as well as greater secured data.
► Nowadays, financial institutions are looking at how to balance on the aspect of meeting the business goal but also protecting consumer privacy.
► As a consumer, what they want is a better user experience, convenience, and a value add service from financial institutions.
► As a financial institution, from a business perspective, what they want is more new customers, better customer retention, and essentially create more value for their customers.
► To bring these two together, financial institutions must understand what a customer looks like, what they want, and when they want the service. This is where data is played as a key role/driver.
Paradigm Shift 2: Buy Now Pay Later
In the past few years, and recently during this pandemic, consumers have been increasingly adopting credit payments and BNPL programs at checkout as buyers can have their products straight away and can pay later and split instalments. It is found that the BNPL model appeals more to millennials. This paradigm shift will, later on, be further explored in the blog. Below are the speaker’s key insights during the event:
► The BNPL model is not new. Similar models have existed since the 1930s. Recently this model really benefited from technology, making BNPL more powerful.
► The biggest challenge of the BNPL model is how to manage the risk, especially from a regulator’s perspective, as it is more considered as a payment product by consumers rather than a credit product, so that is why BNPL providers can deliver excellent user experience, as you wouldn’t need to go through the application process as that itself takes a lot of time for credit checking and etc.
► Overall, the BNPL platform always has the issue of people over-consuming but also, it is providing value by reducing the interests.
Paradigm Shift 3: Digital Currencies
A digital currency usually refers to a money record or balance (number of coins) that lives on a distributed network (called distributed ledger). Digital currencies started as a challenger to the conventional fiat currency system. However, now some governments are considering using the same technology to issue their own national fiat digital currencies. Below are the speaker’s key insights during the event:
► As a consumer, the most important aspect about the blockchain or Bitcoin movement is the business model and the community those providers built up, as the logic behind it is to create more value through the digital currency.
► In a more short term view, Vivian sees these digital currencies as another way of a payment option, as perhaps a more stabilised method than fiat currency.
Paradigm Shift 4: Personal Wealth Management
Wealth management refers to the process of planning and managing savings and investment. It is an essential part of a healthy financial structure. Technology, automation and innovative business models are working towards providing smoother and user friendly, low-barrier wealth management. Below are the speaker’s key insights during the event:
► Regarding Australian wealth management industry, Connie referred that one-third of financial advisors have already left the market, and it is predicted that half of them again will leave the market by 2021, so she believes that the future of personal wealth management will be benefiting from the development of technology and regulation.
As the name suggests: you buy now and pay later. When you use a BNPL service, you can buy a product and delay payment or pay in instalments. Similar models of the BNPL have existed since the 1930s but not until recent years (especially boosted during the COVID-19 pandemic), it has become a buzz due to the significant increase in online activities and purchases. Due to technologies becoming increasingly more sophisticated and being able to facilitate micro-transactions, BNPL has become such a powerful technology.
The Alternative to Credit Card
More and more millennials are turning away from credit cards and, instead, using BNPL as another to spend and improve their finances. Data from Roy Morgan's Digital Payment Report shows that Australians between the ages of 14-34 account for 55.9% of ‘buy-now-pay-later’ users, with those in the 25-34 range making up 33.5% of all users (source). This raises the question: What are the reasons behind this shift of favour?
► More savings: The biggest advantage of BNPL over credit cards is that there is no interest charge on the purchase and they only charge late fees of missed payments. The high interest rate of credit cards has made it fall out of favour. According to Afterpay - a major BNPL service provider, their interest is 0% unless there is a missed payment. With the millennials being more debt-averse than the older generation (source), BNPL services have become their ideal alternatives.
► Quick & easy access: When applying for a BNPL service, users are not required to declare their existing debts or prove their financial ability to repay outstanding amounts. Signing up to the BNPL service is quick and can be done easily even when a user is standing at the checkout online or instore. All they need to do is create an account and complete the purchase.
► Spread the cost: With the appearance of BNPL service, up-front costs are no longer a stress to buyers. The purchase is usually paid off over a few weeks in three to four instalments. Bite-sized payments are more much affordable than a lump sum payment. Moreover, BNPL works well when an unexpected cost comes up or if users don’t have money now but know they will get paid in a few days.
BNPL: Friend or Foe?
We've seen the benefits and flexibility that BNPL offers to buyers. But is it the end of the story? Not yet! What we've just covered is just the tips of the iceberg. No matter how tempting it might sound, BNPL’s users are still exposed to many potential harms.
► Over-purchasing users: The cost of the lack of a proper credit check is that users tend to exceed their financial limit. According to ASIC latest report, 21% of buy now pay later users who were surveyed missed a payment in the last 12 months with 55% of those who had used 2 or more BNPL services (source). The easier the signup process is, the more tendency is that users will use more than one BNPL service. It's hard to keep track of all the instalments let alone all payments from more than 1 BNPL account. The situation is more alarming when “window-shopping" has become a trend during the pandemic.
► Cost can add up: Since BNPL business models are diverse and different between each service provider, it's important for users to understand the surcharging scheme well. Although surcharging fee per transaction can seem to be insignificant, they can add-up relatively quickly. According to ASIC, missed payment fees represented up to 44% of consumer revenue and with the number of missed payments continuing to increase (source), this can be quite alarming to buyers.
► Stress: The stress of being unable to repay instalments can get quite serious. 69% of Australian with a BNPL account said they are ‘financially stressed’ by their payments schedule (source). As a consequence, 20% of consumers surveyed said they cut back on or went without essentials and more than 15% of consumers surveyed said they had taken out an additional loan (source). Loan on loan, which is also called snowballing loan, can be extremely stressful to repay if users cannot plan their payment schedule and this can affect their loan application for car and mortgage later on.
On a Macro Scale: BNPL is Transforming the Credit Industry and Retailers
The rise of BNPL has a major impact on credit providers with Australian consumers shifting from credit cards to BNPL. This is due to the fact that regulations have inadvertently created loopholes to allow BNPL companies to operate without the responsible lending obligations applicable to credit providers. As a result, consumers are able to more easily access money from a BNPL provider than a credit card issuer. As of June 2019, the six major BNPL providers have approved 6.1 million accounts with the number of transactions having increased by 90% between the period 2018-2019 (source). On the other hand, data from the Reserve Bank of Australia show that the number of used credit cards has decreased by 6.6% in the last financial year (source). There are growing calls from consumer groups and regulators for more regulation and greater scrutiny of the industry.
The shift in customer preference and the loopholes in regulations has made the industry become attractive. Many new BNPL providers have entered the market and new models have emerged. Licensed credit providers, such as CommBank, Citi and NAB, have partnered with BNPL providers and begun offering BNPL service or similar products to BNPL. New business models are emerging in the credit card industry due to the rise of the BNPL model.
The growing popularity of BNPL service amongst consumers has forced merchants to adopt BNPL services. Although the main profit stream for the BNPL service is from the commission per transaction from retailers, retailers still benefit from the increased sales as consumers are more likely to purchase through BNPL services. It is reported that BNPL services help e-commerce stores boost basket size at checkout by up to 68% (source). Amazon, one of the high-profile retailers in Australia, has offered BNPL services since last year and major retailers have increasingly offered BNPL service to attract customers. With many BNPL operators expanding their service to other verticals in the retail industry such as healthcare, automotive and travel, it is anticipated that retailers in most verticals will soon adopt a BNPL service for themselves. As the number of BNPL adoptions in merchants seems promising and the main revenue for BNPL operators are from merchants, the future of the BNPL industry is very bright.
Is the BNPL Model Sustainable?
The booming of BNPL is happening right now but can it be sustainable in the long-run? It's undeniable that the pandemic effect has given a great boost to the BNPL service as it gives users the financial flexibility needed. Online shopping trends are very likely to remain permanent which is a positive sign for the development of BNPL in the future. However, as the total outstanding debt of BNPL accounts increased by 53%, from $907 million as at June 2018 to $1.4 billion as at June 2019 (source), this raises some questions about the sustainability of the model.
The drawbacks of the current BNPL model stems from the lacking of the proper credit check and the complication of the surcharging scheme. This allows users to easily overspend and not be able to manage their payment schedule, especially the young users. There have been responses from government bodies for stricter regulations on the industry. ASIC and the Australian Competition and Consumer Commission (ACCC) have taken their action on notifying users on hidden surcharging. In November 2019, the Reserve Bank also commenced its periodic review of retail payments regulation. With more regulatory controls coming in, it’s questionable whether this will further alleviate the drawbacks or it will slow down the booming of the BNPL industry.
Last but not least, we have witnessed the rise of commission models in the last few years with Uber Eats as the most iconic one. Although food delivery apps have been widely adopted by restaurants due to their rise in popularity among users, the raised commision rates have made many restaurants. Whether BNPL services will fall in the same hole is still questionable.
Fintech has definitely emerged as being amongst one of the most growing and important sectors in the tech ecosystem. With more and more fintech companies saturating the market, we can see more and greater solutions, products and services being made available to benefit the community. However, with the rapid growth of fintech companies, we should always keep in mind the prominent and different risks related to consumer data protection and data privacy. The aim should be the balance between both factors of business growth and business governance.
Regarding BNPL services, they have both of its upsides and downsides. The matter here lies down to the question of whether the buyers are able to control their spending behaviour. In conclusion, the rise of BNPL represents the growth of financial technology and its adoption into our daily lives. With many more solutions and products being developed, it's exciting to see how technology will further transform our future.
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Disclaimer: The information provided in the webinar and in this blog is strictly for educational purposes to explain government incentives and startups, and it does not constitute investment, accounting, financial, legal or tax advice. It has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.