By: Kpost
Financing schemes like Buy Now, Pay Later (BNPL) have surged in popularity, offering consumers the ability to purchase high-ticket items with little or no upfront payment.
While these schemes may seem attractive, particularly for those with limited financial means, they come with hidden risks that could lead to financial distress.
Economists warn that BNPL can easily become a debt trap, especially for individuals with poor financial literacy or unstable income.
The Temptation of Easy Credit
Doris Liew, an economist at IDEAS Malaysia, highlighted the dangers of BNPL schemes, pointing out that their accessibility could encourage overspending and lead to a rise in bad loans. She told Business Times that in Malaysia, where consumer credit usage is increasing, BNPL options could worsen the issue of debt accumulation if borrowers fail to meet repayment obligations.
A Business Times investigation found that consumers can easily purchase motorcycles and other expensive items via international e-commerce platforms, often with 12-month zero-interest installment plans. However, Liew warns that these financing options can be misleading. "Many installment plans advertised as 'zero per cent interest' often include hidden fees, such as a 1.5 per cent monthly processing charge, which adds up over time," she explained.
For instance, purchasing a RM10,000 motorcycle using a 12-month BNPL plan with a 1.5 per cent monthly fee would result in an additional RM1,800 in costs: far from a 'zero-cost' installment. Liew emphasized that this lack of transparency misleads consumers, trapping them in financial burdens they did not anticipate.
The Need for Stronger Regulations
As BNPL continues to gain traction, concerns over its regulation have grown. Associate Professor Dr. Aimi Zulhazmi Abdul Rashid of UniKL Business School noted that digital financing is evolving rapidly, making regulatory oversight more challenging. "With increasing competition in the market, regulators must stay vigilant in managing emerging risks," he said.
The Consumer Credit Oversight Board (CCOB) Task Force acknowledged public concerns about BNPL's rising usage and the lack of a regulatory framework for non-bank entities offering such services. To address this, the government plans to introduce the Consumer Credit Act (CCA) in Parliament this March.
The CCA will establish a regulatory framework for credit providers, including BNPL companies, requiring them to assess consumers' creditworthiness and ensure transparency in contract terms. Under the new law, a Consumer Credit Commission will be established to enforce these requirements and safeguard consumer interests.
Balancing Convenience and Financial Responsibility
Despite BNPL’s rapid expansion, its overall impact on Malaysia's financial landscape remains manageable. As of September 2024, BNPL loans made up just 0.2 per cent of total household debt, with RM68.2 million in overdue BNPL payments: representing 3.1 per cent of total BNPL credit exposure (RM2.2 billion).
Still, financial experts argue that regulations alone are not enough. A concerted effort to improve financial literacy is essential, as studies show that 36 per cent of Malaysian adults are financially illiterate, with three in 10 borrowing to cover basic expenses.
"Low-income consumers are particularly vulnerable, often having to sacrifice essentials like food, healthcare, or education to keep up with BNPL payments," Liew noted. "If financial education is not prioritized, these schemes could worsen the cycle of poverty."
BNPL may offer convenience, but without proper financial awareness and regulatory safeguards, it risks becoming a modern debt trap. The question remains: are consumers truly ready for this financial convenience, or is BNPL merely a ticking time bomb waiting to explode?
Information Source: Nst
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