Tech companies dip toes into buy now, pay later market

Fintech and e-commerce companies are providing limited buy-now-pay-later services, edging in slowly on the domain of credit-card companies.

The on-the-fly lending is being permitted for most of these companies under a sandbox program. Current law otherwise prohibits deferred-payment options for buyers of third-party products except when credit-card issuers are involved.

In providing these services, Korea is joining the rush into the buy-now-pay-later market, which in industry jargon is known as BNPL. It is also creating another opportunity for indebted Korean consumers to pile on more debt.

BNPL has created problems in some jurisdictions as some people get their credit ratings trashed and are hit by big fees if they don't pay on time and as some companies lose money trying to compete in the business.

Korea is testing the waters with heavy restrictions on the lending that should, in theory, prevent any disasters. The companies themselves are avoiding conflict with customers by not charging any fees to them and using the program as mainly a marketing and affinity tool.

In simplest terms, BNPL allows people to buy a product and then pay for it later in installments. Four payments is standard. In Korea, just a single payment one month later is the rule.

The main target is people with poor credit or a short credit history, those generally locked out of the credit-card market. A user's credit score is not damaged by delaying payment in a BNPL program in Korea, according to the service providers.

The BNPL market flourished globally in the pandemic as online shopping surged, but it is still in its nascent stage in Korea. It was only last year the government granted regulatory sandbox approval to fintech firms to offer BNPL.

Toss, which runs internet-only Toss Bank, was the latest to introduce BNPL, in March. Other operators include Naver Financial and Coupang. They have different terms and conditions for the programs, including purchase limits.

BNPL payments in Korea are projected to grow by 76 percent on annual basis to $5.4 billion in 2022, according to Research and Markets, a provider of market and research data based in Dublin. The market is projected to grow 550 percent through 2028.

Naver Financial had 270,000 people signed-up BNPL users in December, and cumulative transactions of 33 billion won ($27 million). It said 75 percent of the users are in their 20s and 30s.

Limited programs

BNPL programs are similar to credit cards in that consumers borrow to cover purchases. But unlike credit card issuers, BNPL operators mainly target the economically vulnerable, like young adults or the unemployed, who aren't able to qualify for a credit card due to weak finances or short credit histories.

"I'm a student, and I work part time to earn monthly living expenses," said a 20-year-old university student using Naver Financial's BNPL. "There have been times when I use up all the money nearing the end of a month. BNPL helps me buy daily necessities even when my bank account is empty."

Under Naver Financial's program, which was started in April 2021, people 19 and above can defer payment after purchasing a product from an online store. The payment is made in the following month through a connected bank account.

The spending limit is 300,000 won per month — much lower than similar services abroad. Klarna, headquartered in Stockholm and one of the largest BNPL operators, does not set a predetermined limit for purchases. Afterpay, an Australian BNPL provider acquired by Square (now Block) for $29 billion last year, allows customers to start with a spending limit of around $600, which increases gradually over time.

Under the regulatory sandbox program in Korea, approved companies can offer up to 300,000 won in credit. They are also barred from offering installment plans for customers — everything has to be paid back in a month.

The spending limit for Toss is 300,000 won per month, and for Kakao Pay 150,000 won.

Kakao Pay's spending limit is smaller because it provides deferred payment for transportation fees. The service is offered through the company's app.

These fintech firms are required to file for regulatory sandbox approval every year.

Deferred payment is currently only available to selected customers. The companies did not reveal the standards for qualifying, with one noting that the credit models have to be upgraded to serve a wider range of customers.

Coupang began a BNPL-like program in 2020. Its service is different from those being offered by the tech firms, and it did not have to file for regulatory sandbox approval. It offers deferred payment for products from its own inventory, which means that the service is not strictly BNPL.

Coupang did not reveal the spending limit, but local media have reported that the company allows a maximum of 1.3 million won for monthly advanced purchases.

It also offers installment payment plans.

Coupang's deferred payment plan is commission and interest free. But the company charges 0.03 percent daily, or 10.95 percent annually, for installment credit.

Profit models

BNPL operators say they are offering the service primarily to lock in customers.

"Currently, we don't make any profit from BNPL," said Kim Tae-hak, a spokesperson for Kakao Pay. "The ultimate goal of this service for us is to raise the traffic to attract payment and transfer users, and to introduce related financial products to them."

Even if they were to seek profit, the spending limit is so small that the commission they would receive would be almost meaningless.

"A core profit model of BNPL is receiving commission from merchants," said Jeon Jae-yeon, a spokesperson for Naver Financial, but she adds that unless the financial authorities raise the spending limit, it will be difficult to make meaningful profit.

Naver Financial receives between 1.8 percent and 3.3 percent of total transaction value from merchants, including purchases made using BNPL. Toss did not reveal the commission rate.

The rate offered by Naver Financial is lower than overseas BNPL operators. Klarna charges merchants a flat fee of $0.30 per transaction and a variable fee between 3.29 percent and 5.99 percent. Afterpay charges merchants a $0.30 flat fee and variable 4 percent to 6 percent commission per transaction processed.

Partners or rivals

BNPL operators say the service cannot replace the credit card business, and it may be complementary.

"BNPL may later help users take out loans or even receive a credit card based on the history of their purchases and BNPL payment records," Jeon added.

Card companies usually check disposable income and credit score before issuing cards. A person should have at least 500,000 won in a monthly disposable income to be qualified for a Woori card.

BNPL may be a way into the credit-card business for fintech companies.

"BNPL fundamentally plays the same role as a credit card," said Lee Sung-bok, a research fellow at the Korea Capital Market Institute. "If the spending limit for BNPL grows in the future, that will eliminate the difference between BNPL and credit cards."

He added it is relatively easier for companies with financing capacity, like tech and financial firms, to start BNPL services.

Credit card companies say that BNPL may represent a danger to their businesses. The 300,000 won limit now is equal to the monthly living expenses of some people, such as students, and if the limit is increased, more people could use BNPL services rather than credit cards.

"Deferred payment was allowed as a subsidiary service that can be provided by tech payment firms," said Jung Tae-ho, a spokesperson for the Financial Services Commission. "If the spending limit grows above the current limit, the service will have to be defined and categorized. If it's seen as a credit card business, that would require tech firms to get a relevant license."

BY JIN MIN-JI [jin.minji@joongang.co.kr]