MAS reviewing 'buy now, pay later' schemes
The review will weigh the benefits that new payment models can bring to consumers and businesses.
A review is under way to see if it is necessary to ring-fence consumers from overspending on "buy now, pay later" (BNPL) schemes.
BNPL schemes have gained prominence over the past year in Singapore and other countries because they cover many products in the online shopping sphere, including clothes and fashion accessories, that appeal to young consumers.
"The potential benefits and risks for Singapore consumers have become more relevant," said a spokesman for the Monetary Authority of Singapore (MAS).
"We are thus reviewing the appropriate regulatory approach for such schemes and we have reached out to the industry to gather information on their BNPL business and developments in this space."
The review will weigh the benefits that new payment models can bring to consumers and businesses, while also looking at how to discourage runaway debt in much the same way that the total debt limit of a credit card is capped at 12 months of salary for someone whose annual income is below $120,000.
If a regulatory framework is needed, the MAS said it will be risk-proportionate and evenly applied across all BNPL providers to lower the debt risks for consumers.
For now, the MAS has tips for consumers when deciding whether to make a purchase.
1. DON'T BORROW FOR SHOPPING SPREES
You should always spend within your means and not see BNPL schemes as a way to buy items that are more expensive than you can afford. Getting indebted for such purchases means you will have less to spend on essential items.
If you have to use such schemes, you should read the terms carefully before signing up because high late fees and charges will be imposed on missed or partial repayments.
Know that unless you can make the repayments by the deadline, the item that you think you have bought at a bargain will end up costing 3 per cent to 5 per cent more for every month that you do not clear the debt.
So do not be a hostage to your spending habits; you will enjoy shopping more if you do so within your means.
2. PAYING LATER DOES NOT MEAN IT'S CHEAPER
You plan to buy a new phone and your budget is $600. But you see a BNPL deal for a $1,200 phone that requires you to pay only a $300 instalment.
Since you can afford to pay this, you take the deal.
In doing so, you are not buying something that is more affordable. Rather, you have just exceeded your budget by 100 per cent.
A survey last year showed that close to 30 per cent of shoppers here admitted to being financially worse off when using BNPL schemes.
These folks were enticed by the seemingly low repayments and ended up buying more expensive things that they would otherwise not buy if they had to pay in cash. As a result, they had to tighten their belts for the next few months to pay off the debt.
3. DON'T RUSH JUST BECAUSE THERE IS A SALE
There is always a sale going on somewhere every day in the online shopping world.
So don't worry if you have just missed out on a deal - another one will appear soon after.
More importantly, buy only what you need, and not because the item is on sale.
When it comes to online shopping, the store is always open, so there is really no need to rush and snap up the things you want.
If it is a commonly available product, do a search and compare prices at other stores.
Very often, you may be surprised to discover either cheaper or better products elsewhere. Just like with window shopping, it pays to know your way around the popular shopping platforms.
Sometimes you may end up paying less at an overseas site, even if you include the shipping fees.
4. DON'T BUY MORE THAN YOU NEED
You are looking for a nice T-shirt online and you finally find one that costs $20. When you click to put that item in your shopping cart, the platform gives you a special deal - buy three for the price of $45.
It looks like a good deal because it allows you to save $5 off the original price.
Before you say "yes" to such deals, you should ask whether you really like the T-shirt so much that you want three of them, even if you can buy them in different colours.
If the actual product that arrives does not look as good as how it appears in the photo online, you will end up with three T-shirts that you are unlikely to wear.
So don't be tempted by "savings" that are aimed at making you buy more.
It is the same as buying soft drinks at the movies. Due to the small price difference between the medium-sized and large-sized drink, you are likely to buy the bigger cup, which you will likely never finish.
Just remember that so long as you have money, the online stores will always be open for you, so there is no need to rush or buy more than you need.
After all, there are the annual sales that come not once, but several times every year.
Buy now, pay later schemes: New platforms empower users but could also be debt traps
If you have a headache, would you split an aspirin into three small portions and ingest the medicine slowly so that the pain lasts longer? Of course not.
Most of us would dismiss this as just plain silly. Why would anyone want to prolong the pain when one can just end it?
But this is what many young people are doing these days when they embrace a new digital payment system that allows them to shop for clothes, accessories, jewellery and practically anything that they can order online, and yet delay the pain of paying for them.
Known as the "buy now, pay later" (BNPL) phenomenon, these digital loan providers allow customers to either shop online or at participating physical stores without the need to pay for items immediately.
Like a hire-purchase arrangement, customers will get bills in instalments when the providers charge the amount to their registered credit or debit cards.
But unlike banks, which will verify the income status of customers before loans are given, such checks are not needed for BNPL, and even 18-year-olds who are not working can join with supplementary credit cards given by their parents.
Say, you want to buy a pair of shoes for $120. If you pay with a credit card, the whole amount will be charged to you. But if you buy through BNPL, the provider will pay for the shoes and it will collect the sum from you over three months, at $40 a time.
For some people, such loans are useful as it helps to ease cash flow, so they do not have to pay the whole sum at the point of purchase.
Buying things under an instalment plan with a credit card is not new - most, if not all families here, would have done so if they have ever bought a new TV, refrigerator or furniture.
But this is where the similarity between such instalment plans and BNPL ends - the latter allows you to pay on instalment for even inexpensive items such as clothes, shoes and bags that would not qualify for a quick loan in the past.
You will not buy a TV or bed every month, but you can end up shopping for clothes, gadgets, handbags and other stuff excessively if you do not have to pay for them immediately.
Danger of creeping high debt
To join such a scheme, you need to have a credit card or a debit card that deducts from your bank account directly.
If you have signed up using a credit card and use BNPL to pay for your online purchases, the provider will put the monthly instalments on your credit card like normal expenses.
While the providers will be paid by the banks, you will have to clear the debt or face a 2 per cent interest charge on any unpaid debt.
Users who put BNPL purchases on their debit cards will have the sum directly deducted from their bank accounts every month.
What if you don't have the money to pay off the instalments? You should know that there is no free lunch in this world: BNPL providers will make a meal out of those who cannot pay by charging late fees that come with whopping interest rates that can be as high as 36 per cent to 60 per cent on an annual basis.
A $5 late fee may seem innocuous for a purchase of a $99 shirt, but if you cannot clear this debt for a year, that same shirt will now "cost" $159, or 60 per cent more.
The Monetary Authority of Singapore (MAS) advises consumers to be cautious when using BNPL schemes and instalment plans for purchases.
"Consumers should also bear in mind that these are still debts to be repaid, with potential late fees and charges imposed if consumers miss repayments. Where consumers are not careful and overspend, such schemes can still result in overstretched finances and cause potential financial distress," its spokesman says.
The concern is justified because most BNPL providers even allow people with no income, such as 18-year-old students, to use such services.
Overspending is the biggest financial sin
Contrary to popular belief, most folk who end up in financial ruin usually do not have expensive tastes or a penchant to buy luxurious goods. Their expenses are not very different from those of an average family, except that their spending usually exceeds their monthly income, and they keep doing so until their mountain of debt buries them.
Frankly, if you are a compulsive shopper, it is better to use cash to pay for things that you yearn for. At least when your wallet is empty, you have no choice but to stop.
If you opt for BNPL for clothes, you can be lulled into thinking that you are spending within your means. For instance, you can afford to pay $1,000 every month and so you shop for up to $4,000 and split the bill into four instalments. When you do this, you should ask whether you can continue to pay this amount for the next few months, on top of your normal expenses?
Pay later does not mean free
If you need to use BNPL for even inexpensive items, it is a sign that you have a cash flow problem. Perhaps you want to earn some rewards that come with such platforms, but this should not be the reason for you to end up buying things that you either do not need or cannot afford.
Around a third of credit card holders here do not clear their expenses monthly and have to let the remaining debt roll over. Every $100 that is unpaid attracts a $2 late fee - if you owe $10,000, your debt will grow by $200 in just a month.
So don't let the ease of shopping on instalments add to your credit card debt as this is the most common cause of financial ruin in Singapore.
Better to save now and buy later
Life is definitely less exciting if you cannot buy the things that make you happy. Well, before BNPL providers came along, many people were already shopping the old-fashioned way - that is, saving for the item before purchase.
If you want to buy something that you cannot afford immediately, how about setting aside just $50 a month until you have enough?
Chances are, you will appreciate and enjoy the purchase even more because you truly paid for it with your hard-earned money.
Parents have to do their part
Imagine this scenario: You give your college-going children supplementary credit cards so that they can spend on essentials as well as have meals with their friends.
Normally, they chalk up monthly expenses of about $300. One day, you see that the monthly bill is $500 but you still pay.
What you may not realise is that the actual bill for that month should be $1,300; it's just that allowing the customer to split a purchase of $1,000 into smaller monthly instalments of $200 over five months makes it easier for young people to keep their extravagant purchases from their parents.
If young people develop a taste for excessive shopping even when they are not earning money, imagine what habits they will have when they start to have money on their own.
Perhaps they do have a good reason why they need a quick loan from BNPL that month - maybe they are trying to surprise you with a nice birthday gift.
Either way, it is time for you to start a pep talk with your children on the prudence of saving and the ills of living on credit. And do it now rather than later.
Source: Straits Times © Singapore Press Holdings Ltd. Permission required for reproduction.