Regulating BNPL to protect consumers, financial system


KUALA LUMPUR: The Buy-Now-Pay-Later (BNPL) services have emerged as an appealing payment and funding solution for many amid its exponential growth, which makes it vital for it to be regulated for the betterment of consumers, lenders as well as avoid any potential risk to the financial system, said experts.

Based on a survey conducted on 10 non-bank BNPL providers, the BNPL market’s transaction value skyrocketed to RM1.49 billion in 2021 from RM55 million in 2020. The global BNPL industry is estimated to be worth around US$157 billion (RM699 billion).

Hence, the Consumer Credit Act (CCA) which is expected to be tabled in the second quarter of 2023, is timely to ensure the financial system stability and growth.

The CCA will serve as a pre-emptive approach after observing the trend, risk, and potential effects on consumers’ financial position, and it will be administered by the Consumer Credit Oversight Board (CCOB) under the Ministry of Finance (MoF).

UOB Kay Hian Wealth Advisors Sdn Bhd head of wealth research and advisory Mohd Sedek Jantan said regulating the BNPL industry is critical to protect consumers from possible risks, such as the exploitation of customer data and a lack of help for customers who are vulnerable or suffer financial difficulties.

“Who will review the contract between BNPL and the consumer? On what basis is the ‘approved amount’ provided to the consumer? The potential to put consumers overly in debt with multiple BNPL products and, most importantly, buy now and unable to pay later?

“The BNPL provider’s ability to conduct a thorough creditworthiness and affordability assessment of the consumer is hindered by the compressed timeframe when entering into a contract. These are the three reasons why this industry must be regulated as soon as possible,” he told Bernama.

A consultation paper on the CCA has revealed that there is a growing number of unregulated players in the consumer credit space, including BNPL companies, non-bank factoring and leasing companies, impaired loan buyers, and debt collection agencies.

The initiative is supported by Bank Negara Malaysia (BNM) and the Securities Commission (SC) in collaboration with the Ministry of Domestic Trade and Consumer Affairs, Ministry of Housing and Local Government, Ministry of Entrepreneur Development and Cooperatives, and the Malaysia Co-operative Societies Commission of Malaysia.

Sharing the same sentiment, Malaysia University of Science and Technology professor and dean of the Institute of Postgraduate Studies, Geoffrey Williams, said the market cannot be free for all and there must be a rule of law to protect creditors and lenders.

“So, the idea of unregistered or unregulated providers must be eliminated in the design of any new BNPL framework and it is a good trend if properly regulated and transparent. It is a better option than using expensive credit cards or borrowing from illegal loan sharks. It provides a new opportunity in consumer credit if there is effective regulation and a high level of financial literacy among consumers,” he said.

Williams also emphasised that BNM should also play a role to look at systemic financial sector risk as well as risks in lending institutions.

“Islamic options should also be made available as part of the risk protection framework,” he said.

Mohd Sedek said that the rise of BNPL as an alternative to credit is unavoidable and, similar to the cases of ride hailing and food delivery, the key to growth for BNPL providers is acquiring merchant partnerships as quickly as possible.

“Not only that, the forthcoming digital bank will stimulate the expansion and growth of BNPL,” he opined.

Addressing the concern over the household debt, Mohd Sedek said BNPL would certainly impose a certain extent of pressure on household debt as BNPL does not supply the regulator with client credit information and the method is marketed as being superior to credit cards.

Citing statistics by the Malaysian Department of Insolvency, he said in 2021, more than 20 bankruptcy cases were filed by individuals under the age of 25, while 1,060 cases were recorded for 25 years to 34 years old group.

Williams expressed a different perspective on household debt, stating that while BNPL may add to household debt, it may also simply reallocate debt from credit cards, and the net effect of BNPL on household debt remains unknown.

“It can reduce their reliance on expensive credit cards, which is a big problem for the younger consumers,” he explained. — Bernama