One big loan or many small ones? BNPL as a route to credit inclusion

The Buy Now Pay Later industry has something of a monopoly on the consumer credit headlines these days. That said, while every story might be about BNPL, not every story is following the same narrative.

This month alone, there have been positive stories on Goldman Sachs’ $2.2bn acquisition of GreenSky alongside stories warning of increased investor concerns; and stories labelling the industry as “the ‘new’ payments trend generating $100bn in sales” and “Switzerland’s next big thing” alongside those that describe the rise in BNPL as dangerous or raising concerns about regulatory shortcomings.

With so much debate surrounding the subject, I reached out to Georg Steiger who, with BillEase, is leveraging the more positive aspects of BNPL to improve access to credit in the Philippines.

“… you guys are doing great stuff on rolling out ecommerce, but we all know that payments is still an issue. It's all cash on delivery, very few customers have credit cards and the ones who have, don't want to use it on a website - so why don't we do something together in payments?”

So, there’s a logistical problem they’re solving, in a country where card penetration is desperately low.

And there’s a good reason that we can expect them to close this gap better than, say, the existing card providers, who have far more capital at their disposal. In a traditional model, a lump sum of exposure is created on day one, enough to cover a couple of months’ worth of spending all at once. As such, a card would only ever be issued when someone was really confident, confident enough to take that big gamble.

BNPL breaks that required exposure down into its component transactions, similar to how low-income consumers might prefer to buy household supplies in small sachets, that while less convenient over time than a single large bottle, allow for better cash flow management. Each ‘loan’ is now only for one transaction, lowering the amount of confidence a lender needs, and thus increasing the borrower’s odds of being approved.   

“I think they call it sachet products, right, these little shampoo and stuff? So, it's like sachet loans. So, we try to give the customer something where we're pretty sure they can afford, and as long as they're willing, they can they can pay it back again. And customers they are quite happy to do that – ‘at least you guys give me a chance. And you charge me fair rates.”

That last one’s the kicker because the upside of the ‘sachet’ approach is that rather than rising prices to reduce risk, BNPL lenders are able to reduce the risk to keep the prices low.

There’s also a strong case to be made for instalment products as a route into credit activity. In the Philippines, it is not just the card penetration that is very low, but plain ol’ bank account penetration, too, with 5 out of 7 adults considered unbanked. In an environment like this, where credit literacy is poor, credit cards can be a problematic first product. The direction of balance growth means that a consumer who finds themselves in financial difficulty, invariably does so with their balance at or over their limit, or in other words saddled with the largest possible burden.

On the other hand, term balances move downwards in a predictable manner. So, if you take a loan out today, and fall into trouble in the future, the balance you owe will always be lower than it was on day one.

Now, the most common objection raised is that in an environment stuffed with unconnected BNPL providers, a consumer could stack up small term loans until they end in the exact same position as the troubled cardholder.

This is true, and a valid concern, but often the BNPL environment is more connected than we might think. BillEase, for example, already use the credit bureau in their decisions. And more than that, too, since 80% of their customers have no existing bureau record they’re also crunching a huge amount of unstructured data. And with Open Banking coming to the Philippines, broad sharing is only going to be easier to achieve.

So, yes, like anything growing this fast, there are some concerns to keep an eye on, but BNPL can also be a way to increase access to credit in an affordable way. But you can hear Georg explain all of this in a much more compelling way in episode 3 of How to Lend Money to Strangers, available by searching on most major podcast players or via the links on my page here.

#BNPL #AccesstoCredit #Philippines #creditrisk