China's buy now pay later market is growing — but challenges remain, experts say

China’s buy now pay later market is set to grow — but the industry is still at a nascent stage, and challenges lie ahead, experts told CNBC.

There’s been a surge of interest in BNPL services in China over the last decade, said Kapil Tuli, marketing professor at the Singapore Management University’s (SMU) Lee Kong Chian School of Business.

Buy now pay later services are a form of payment where consumers make purchases and pay them off over a period of time in several instalments, often interest-free. While BNPL is typically interest-free, some providers charge high late payment fees.

A few factors are fueling the “perfect storm” for the growing trend, according to Tuli. They include unprecedented low interest rates, the rise of online payment through “super apps” like Alipay and WeChat and extremely well-funded fintech start-ups eager to acquire new customers.

In addition, China’s cashless society, huge e-commerce market and mobile and online shopping have become a ubiquitous to life in China, said Boh Wai Fong, deputy dean of Nanyang Business School at Nanyang Technological University in Singapore.

The Chinese BNPL sector emerged as one of the fastest growing markets in Asia-Pacific region, according to a survey by research and consulting firm PayNXT360.

According to the Q2 2021 BNPL Survey, BNPL payment in the country is expected to grow by 51.3% on an annual basis, and could reach $82.78 billion in 2021.

The rise of online shopping and “seamless integration” of BNPL payments with e-commerce platforms has encouraged more purchase decisions to be made, said Boh.

In 2020, about 74% of Chinese people used mobile payments every day because of its ease and convenience, according to a survey by the Payment and Clearing Association of China.

Tech-savvy Chinese millennials are also jumping on the bandwagon to satisfy their hunger for the latest gadgets and luxury goods, research shows.

Those between the ages of 18 and 29 constitute 36% of the borrowers of consumer finance, excluding housing loans, according to a study by the Academic Center for China’s Economic Practice and Thinking at Tsinghua University.

But critics have warned that the trend can fuel overspending habits. A consumer advocacy group in the U.K. conducted a study and found that almost a quarter of BNPL users spent more than they had planned to, because the service was available.

With Covid-19 impacting household incomes, Chinese households and consumers may turn to BNPL as an option to “smooth out” their expenses over the long term for big-ticket items, said Boh.  

The growth in BNPL is “inevitable,” according to the professor, who pointed out that unlike other markets, the e-commerce and mobile payments industries in China are already “very stable” and are dominated by several big players like Alibaba and Tencent. That means there may be limited opportunities for new players like international companies to break into the Chinese market, she said.

Popular players in China included Ant Group’s micro lending business, Ant Check Later. Also known as Huabei, it enables Alipay users to make online and offline purchases without credit cards, with options to repay them through instalments.

One BNPL player that’s set its sights on China is Atome, a fast-growing Singapore-headquartered start-up.

The financial tech company operates in nine markets, including Singapore, Indonesia, Vietnam, Philippines and mainland China. It has over 20 million registered customers in Asia, as part of its parent company Advance Intelligence Group.

While it targets young professionals in their early 20s to late 30s, the company is also seeing a pick-up in older segments, such as those above 40 years old, who value the “convenience, transparency and flexibility” that BNPL brings, Tongtong Li, general manager of Atome China told CNBC in an email.

Since launching in mainland China in September 2020, the business has “rapidly expanded” to cover tier 1 megacities and smaller tier 2 cities in regions like Chongqing, Chengdu and Luzhou, said Li.

It has also grown to include a merchant network of 1,500 local and international brands like Nike, New Balance, and Tissot. Consumers spend around 1,000 Chinese yuan to 1,500 Chinese yuan (about $157 to $235) per transaction in beauty, fashion make up and skincare products, according to Li. She added that they are also seeing growing momentum for the luxury fashion category.

Major banks are also throwing their weight behind BNPL firms.

Atome Financial, the business line that operates Atome and its digital lending platform, inked a 10-year partnership with Standard Charted. The partnership includes $500 million in financing and collaboration of co-branded products in multiple markets in Asia.

“BNPL is still at a relatively nascent stage in mainland China but we’re expecting a strong medium- to long-term growth for the industry,” said Li.

She said Atome will continue to expand to more tier 1 and tier 2 cities given the “huge potential” it holds, adding that the company can take advantage of its regional market presence to drive more cross border transactions between Southeast Asia and mainland China.

Since the end of last year, Chinese regulators have widened their regulatory crackdown on China’s so-called “platform economy,” which covers a range of e-commerce sectors from online shopping to food delivery and fintech.

The practice of buy now pay later “encourages spending, sometimes triggering what is thought as excessive spending,” said Ruan Tianyue, assistant professor in the Department of Finance at the National University of Singapore Business School.

Like other forms of consumer credit, a fraction of BNPL balances may have to be declared as non-performing loans when the borrower defaults or is late in making a payment. “Too high a level of non-performing credit can threaten economic and financial stability,” she said.

NTU’s Boh pointed out that as BNPL schemes are still “relatively new” in China. The regulatory framework and industry guidelines are not yet mature, and hence, it is important to develop the system, she added.

Tuli from SMU agreed, and said that while BNPL has become a popular and viable option for Chinese consumers who find it hard to access credit cards, the sector is likely to see a more “measured, understated” market growth in the near future.

“In the last six months, the mad rush for growth in China has now been calmed down. The Chinese regulators are very sensitive [about] anything likely to create systemic risks to the financial systems,” said Tuli.

“Going ahead, companies need to be careful in how they entice consumers… I don’t expect to see a wild wild west growth which we saw earlier,” he said, referring to how the BNPL sector was seeing promising growth before the tech crackdown.

— Correction: This article has been updated to accurately reflect that Huabei is still in operation.