There have been some significant moves in the space in recent years, with major BNPL provider Klarna recently valued at over $45 billion, Australia’s Afterpay purchased for $29 billion by Square, and the entrance of major fintech firm PayPal.

BNPL is expected to represent 12 percent of all e-commerce sales across the Asia Pacific (APAC), North America, Europe and Australia by 2023, up from 2 percent today. Eighty percent of all BNPL transactions will be completed online in mature markets, with a doubling of growth for in-store BNPL purchases. With low penetration today due to a lack of customer awareness and the limited availability of financial providers, APAC is expected to be the next growth story with a remarkable 145 percent projected CAGR to 2023.

Buying into BNPL in Southeast Asia

The region’s retail sales market is expected to expand from $374 billion to $457 billion by 2023, with online sales increasing 44 percent annually to represent 20 percent of total sales. That reflects a valuable growth opportunity in BNPL penetration.

With attractive market demographics and early signs of accelerating adoption, it is expected that Southeast Asia’s addressable market will be as high as $27 billion by 2023, with a projected BNPL net revenue of up to $1.5 billion. Market penetration of 6 percent is projected to be double that of the wider APAC region. In countries like Indonesia, surveys show a whopping 78 percent of respondents expressing familiarity with BNPL and its advantages.

Funding in Southeast Asia is already outpacing APAC, driven by investments in Singapore and Indonesia. Southeast Asia’s BNPL fintech companies attracted 30 percent of total APAC BNPL funding between 2016 and 2020, or 10 percent of the global total. This investor confidence is seen in companies such as Akulaku, FinAccel and Redivo.

Mature BNPL markets such as Australia offer valuable insight into Southeast Asia’s potential. Rapid market growth has seen an estimated 20 percent of Australians using BNPL and approximately 60 percent of merchants offering the service.

Australian demographics also reveal positive signs for Southeast Asia, with high usage in younger groups. Key categories include fashion and travel, and while consumers with low FICO scores dominate, users display a broad mix of creditworthiness.

The regional landscape is relatively fresh in Southeast Asia, but fintechs such as Atome and Hoolah are expanding to target both offline and online merchants, enjoying rapid growth in transaction values. Open ecosystem players like Akulaku and a Traveloka-Bank BRI partnership are exploiting BNPL services as part of evolving ecosystem offers. E-commerce players like Shopee are introducing BNPL as part of their standard features. Meanwhile, credit card companies and banks are exploring partnerships with winners from other markets, such as Pine Labs.

Key BNPL areas to watch

Establishing the right model will require a strategy that reflects the local landscape as well as rapidly evolving market conditions.

While online space is critical, e-commerce players are expected to dominate this area with closed-loop solutions. Offline sales still represent the majority of sales volumes and thus, scaling together with offline merchants is key. Challenges such as integration hurdles, secure customer information, educating customers in-store and maintaining positive user experience during lengthy application processes must also be overcome.

Regulation is also likely to tighten as early plays by technology companies increasingly come under the review of financial authorities. Consumer groups in Europe and Australia are already pushing for greater oversight of unregulated BNPL lenders around anti-money laundering (AML) and know your customer (KYC) checks and fraud protections.

In addition, BNPL players will have to develop sustainable methods for revenue generation. While merchant linked fees are a good way to start, we believe such fees will reduce over time. Players need to build consumer financing leveraging BNPL transaction data, coupled with value-added services such as advertising or bill payments, for a long-term model.

The success of BNPL in India offers some interesting lessons on this evolution, with four broad operating models emerging in the market:

1. Pureplay Fintech players such as Zest are targeting underbanked segments, serving customers without credit cards with rapid-turnaround approvals. Customers opt in at online or offline check-out pages, with credit risk analysis undertaken by lending partners.
2. Closed-loop ecosystem players such as Flipkart and Myntra offer BNPL within an existing customer ecosystem, often supported through credit risk analysis by third-party fintech players. Consumers opt in to BNPL through the in-ecosystem checkout page.
3. Point-of-sale (POS) aggregators such as Pine Labs leverage in-store POS systems to drive BNPL growth. Pine Labs operates on over 450,000 POS systems across 150,000 merchants, backed by 35 banking partners. Customers can conveniently sign up to BNPL at the point of sale, with credit risk undertaken by partner banks.
4. Banks such as ICICI Bank and HDFC Bank offer preapproved BNPL based on transaction history, with consumers able to opt in via online checkout pages. Pay later amounts are automatically deducted from savings on an agreed schedule.

Driving BNPL success

While banks started this journey early with interest-free loan products, they failed to capitalize on this head start, facing cultural barriers around attitude to risk, reluctance to transition, slow innovation pathways and poor engagement with key market segments such as millennials.

This failure to corner the market means BNPL share remains open for acquisition. Succeeding on that journey should include focus on seven key factors.

1. Addressing the underserved. Embrace underserved segments with limited credit history, minimal banking exposure and smaller merchants.

2. Keep it simple. Leverage simple value propositions and user-friendly products.

3. Leverage data. Use new data sources and credit risk assessments to make decisions quickly.

4. Flexible online and offline. Integrated solutions for online and offline delivery, such as POS machines, easily integrated across merchants.

5. Superior online UX. Deliver user-friendly online signup and product search.

6. Move fast. Exploit market gaps and outdated regulations to find market opportunities.

7. Add value. Build added value with cross-selling (loans, value-added services and advertising) beyond BNPL to diversify revenue as margins are squeezed by growing competition.

With Southeast Asia’s potential addressable market growing to $27 billion by 2023, backed by extremely attractive demographics and market conditions, BNPL is undoubtedly set to accelerate in the region in coming years. Choosing the right play for each market will require a tailored strategy, but by leveraging the key success factors outlined above, prospective market players could buy into a substantial revenue opportunity.

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Tushar Agarwal and Sumit Kumar are both Managing Director & Partner at Boston Consulting Group (BCG).