Budgeting in a BNPL world

BUY-NOW-PAY-LATER (BNPL) services have been all the rage in recent months, and for good reason. 

Generally, these services help break down large purchases into 2 to 4 monthly payments, helping consumers spread out their payments so that they have more cash on hand for other needs. Providers like Atome and Grab have also been pushing discounts across various products and services, both online and in-store. 

In February this year, I decided to treat myself to a larger computer monitor, so I could finally stop ruining my eyes with my tiny laptop screen. 

BNPL providers like Atome and Grab were heavily promoting their services, with large banner ads across a home grown monitor company’s online store. As a new user of Grab’s PayLater service, I could get the monitor I wanted for S$30 off on top of the store’s promotions. 

After providing the Grab app with some personal details, payment was seamless and I was off to the races. 

Similarly, as I was signing up for a gym membership recently, the persistent salespeople recommended that I leverage Atome’s promotions. Within minutes of setting up my account with my Singpass account, I had a S$50 voucher for my membership. 

Yet, I wondered if this would affect my spending habits. Being newly employed, had I crossed the rubicon of instalment payments this easily? 

The idea of paying in instalments is certainly not new, with instalment payment plans (IPPs) being offered by banks with merchants like Lazada and Harvey Norman. 

Still, BNPL services differ in that they have much lower spending limits. For instance, my Grab PayLater limit was S$1,200, while credit cardholders get a limit of S$3,000 with Atome. 

Unlike IPPs, most BNPL services have lower late charges too. Typically, IPPs would charge about S$100 in late charges on top of more than 20 per cent per annum in interest. 

Grab and Atome charge S$10 and S$15 late fees respectively. Pace charges S$10 and an additional S$1 per day that a payment is late, up to 25 per cent of the transaction value or S$60, whichever is less, while Fave charges 1.5 per cent in late payment fees. 

BNPL services also freeze accounts to prevent further spend when there are outstanding payments so that individuals do not continue spending beyond their means. 

In theory, all these services help you to improve your personal cash flow while setting spending limits. 

Buy more and more now

However, such services do not all engage with the Credit Bureau Singapore (CBS). Without credit checks, customers could chalk up debt with multiple services more easily than they could by signing up for new credit cards with established banks.

Grab and Atome said that they do not do credit checks on customers through the bureau. On the other hand, Pace does checks and provides users’ usage history to the bureau. 

While default rates appear to be low at the moment, with Atome and Pace reporting rates of under 1 per cent and under 0.8 per cent respectively, I wonder if these rates will rise when BNPL transactions gain more traction. 

In response to a parliamentary question, Minister of State for Trade and Industry Alvin Tan noted that BNPL transactions made up less than 0.5 per cent of the S$103 billion in credit and debit card payments in 2021. 

BNPL services can also be used on smaller transaction values, unlike IPP, which may have a minimum spend of S$100. This means that if you bought a S$48 item and were late on both your S$16 instalments, you could be looking at a total admin charge of S$20 with Grab or S$30 with Atome. 

While these services normally auto-deduct such payments from your credit or debit cards, I tend not to opt for such automatic deductions because I would like to get a grip on what I am spending. 

As I manage more recurring bills, like my mobile phone plans and various streaming services, I have noticed myself losing track of my monthly spend. Automatic instalment deductions would simply fly under the radar. 

Clearly, BNPL companies understand how these mechanisms could increase our propensity to spend, too. 

Fave’s marketing material to its merchants online cites a 30 per cent increase in average order value when a bill is made more affordable. In Grab’s press release announcing the expansion of its PayLater service, the company found that on average, users who used PayLater instead of their Grab wallets saw basket sizes increase by 12 per cent. 

Not all of us can expect 12 to 30 per cent increases in our pay cheques yearly, which means that these increases are coming out of our potential savings instead. 

Credit Counselling Singapore's general manager Tan Huey Min noted that the phenomenon is not new, as research has shown that the move to more cashless forms of payment has led to increased spending. BNPL services are the latest evolution of such forms of payment. 

“When you use cash to make a purchase, you are likely to be more prudent because you have to part with the cash itself,” she said. 

Being mindful with our money

Not all hope is lost, though. While we may be moving towards more cashless payments, Ms Tan suggested that we can adopt simple habits to stay in control of our finances.  

Firstly, we could start by creating a monthly budget that we are comfortable spending. This should be a limit that is not too restrictive, since frequently busting the limit would just lead to the loss of control anyway, defeating the purpose of a budget. 

Next, we should be mindful when we make certain purchases. BNPL can help in cases when you have a budget of S$500, but you would like to buy something that costs S$400. Instead of forgoing the purchase, you could split up the purchase into 4 S$100 payments per month, leaving you with some cash for the rest of the month. 

Using an expense tracker could also help with such budgeting, as the mindful act of keying these details into your phone could help you see how much of your budget you have left. 

Personally, I have gone one step further to create 2 bank accounts for myself, with 1 “spending” account and 1 “savings” account so that I can see when my budget is going low. 

I also decided to pay off my BNPL instalments ahead of time as I would rather keep track of them in my own bank statements, where I have the flexibility of recording the budget deficit and making up for it in the coming months. 

Notably, with traditional IPPs, paying early would have cost me as such plans generally incur early termination fees.