Buy Now + Pay Later = Personal Loans

Technological advancements have given new impetus to traditional businesses, bringing about welcoming innovations in some cases.  At the same time, there are also some new products whose operations are similar to traditional concepts.  You may have come across the term “Buy Now, Pay Later” (BNPL) recently, or have even used related products.  BNPL products often feature interest-free payment by instalments.  Coupled with the rising trend of online shopping, BNPL products have been trending in the US and European markets in recent years.  Such products have also emerged in Hong Kong recently.  In practice, BNPL products are not much different from unsecured personal loans.  As such, consumers should be mindful of the related risks of borrowing.

BNPL products are gaining popularity among consumers.  In the US and some European countries, the number of customers and transaction volume of BNPL products have been multiplying in the past one to two years.  At this juncture, BNPL products are still at the initial stage of development in Hong Kong.  While currently BNPL products in the market are mainly offered by non-bank fintech firms, we also note that some local banks have started launching instalment payment products which are marketed as BNPL.

BNPL products in the market generally carry the feature of payment by instalments, and the mode of operation is similar to that of conventional instalment payment products, though with a shorter repayment period.  Providers of BNPL products (including technology firms, banks, other financial institutions, etc.) will make lump sum payments to the merchants concerned on behalf of customers and then collect the paid amount from the customers by instalments.  In other words, BNPL essentially entails borrowing by the customers from the providers of the BNPL products.  

Besides the common feature of interest-free instalment payments (interest or handling fee will be charged for late payments), another factor contributing to the popularity of BNPL products is smart market positioning.  Some online shopping platforms place BNPL alongside other payment methods such as credit cards, and consumers may perceive BNPL as just another payment option.  With such packaging, some consumers may unintentionally spend beyond their means.  If they cannot make the repayment in the end, their credit records may even be affected.

The HKMA has been in the forefront of promoting the development of fintech in Hong Kong.  However, as we embrace technological innovation, the rights and interests of the consumer must also be safeguarded.  In fact, the marketing approaches for BNPL and the associated risk of leading to over-borrowing have drawn the attention of regulatory bodies in various jurisdictions.  The HKMA issued today a circular to banks on BNPL products, requiring them to implement seven consumer protection measures as follows:

1. Banks must include the educational message of “To borrow or not to borrow? Borrow only if you can repay!” in the advertising and promotional materials for BNPL products, a requirement currently in place for other loan products for retail customers and SMEs;
2. Banks should not create an impression that BNPL does not entail borrowing. Banks must clearly and prominently disclose in the marketing and promotional materials of BNPL products that they are “credit products”;
3. When engaging or partnering with e-commerce platforms, banks should assess the potential implication on impulsive borrowing if the BNPL products are set as the default or preferred choice of payment methods;
4. Banks must ensure that the relevant fees and interest charges are disclosed in a clear manner in the advertising and promotional materials of BNPL products, and the relevant fees and interest charges should be taken into account in the calculation of Annualised Percentage Rate for customers’ reference. Where a BNPL product is promoted as “interest-free”, any other fees or charges applicable should be included in the same piece of advertising material;
5. Banks are required to specify in the Key Facts Statement of a BNPL product that, if the borrower is overdue in repayment, it may adversely affect the credit records of the customer, and may even affect access to credit in the future;
6. Banks should ensure that the customer is duly informed about whether and how the chargeback mechanism is applicable to the BNPL product; and
7. During the approval process for any applications for BNPL products, banks must assess the applicant’s credit status and take into account the applicant’s ability to repay.

Banks are required to implement the above measures by the end of this year in order to enhance consumer protection.

To quote the Shakespearean adage, “a rose by any other name would smell as sweet”.  A credit product, whatever its name and whether referred to as “borrowing”, would still entail repayment obligations.  Please remember: “To borrow or not to borrow? Borrow only if you can repay!”

Arthur Yuen
Deputy Chief Executive
Hong Kong Monetary Authority

2 September 2022