Buy now, pay later

LatAm’s soaring household debt means BNPL is becoming less attractive.

The kind of short-term financing known as Buy Now, Pay Later (“BNPL”) is growing in popularity across Latin America. However, as inflation soars, eroding consumer purchasing power, alongside unemployment and household debt becomes increasingly unsustainable, BNPL is losing its attractiveness.

A partner at a São Paulo-based digital business and management consultancy explained, “BNPL can exert both a positive and negative effect on the credit rating of consumers. For instance, a responsible party to a BNPL financing scheme who may not have a credit card or has a low purchase threshold will generate a payment history with a positive profile. The opposite is also true.”

“Buy-Now-Pay-Later can exert both a positive and negative effect on the credit rating of consumers. For instance, a responsible party to a BNPL financing scheme who may not have a credit card or has a low purchase threshold will generate a payment history with a positive profile. The opposite is also true.”

Partner, digital business, São Paulo

Already, around 60% to 70% of credit card purchases in Brazil are made in installments. However, credit card purchases have a limited function, as banks will place an appropriate limit for each customer.  Thus, credit card customers with a purchase limit of BRL 2,000 will not be able to use their cards to pay in ten installments a purchase valued at BRL 3,000. The bank takes into consideration the total amount of the purchase instead of the installments. Last year, almost BRL 80 billion in purchases were rejected because of this reason.

The director of a financial advisory firm in Mexico explained, “On the short term, BNPL is attractive for middle-class households that have good financial management, in other cases where household finances are more stretched, it can be a riskier option. It remains a limited alternative to more traditional forms of borrowing. One of the major barriers to its expansion lies in technological disparities and a lack of access to electronic means of purchase. The pandemic will fuel expansion as credit becomes available to a broader range of people.”

“On the short term, BNPL is attractive for middle-class households that have good financial management, in other cases where household finances are more stretched, it can be a riskier option.”

Director, financial advisory business, Mexico

The greatest asset of the BNPL is that it will facilitate greater financial inclusion for people across the region, many of which lack access even to a basic bank account. Take Mexico for example, where access to credit and financing is strikingly uneven. Among the innovative startups that have advanced in recent years is Kueski, a Mexican BNPL startup which secured USD 200 million in debt and equity last year.

Latin America’s consumption and credit landscape is complex. In the region’s second-largest economy Mexico, this has been due not only to the pandemic-induced economic crisis itself but increasingly because of persistently rising interest rates due to inflation. According to recent regional data, it is estimated that there will be, indeed there is already, a gradual contraction in consumption. There is a lot of uncertainty in households who, naturally, are reluctant to incur purchases on credit.

Across the region, even those who are less financially aware can increasingly sense that their indebtedness capacity is decreasing. BNPL schemes are attractive to the extent that the interest can be comparatively attractive, but they are not insulated from inflation.

Sustaining these attractive rates is the main challenge to overcome lest they see their purchasing consume hunt elsewhere.

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