[Opinion] The Key to Revitalizing Korean-Style BNPL Services

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University

Recently, the 'BNPL (Buy Now and Pay Later)' service, which refers to purchasing first and paying later, has been gaining attention. The decrease in household disposable income due to COVID-19 has also contributed to the increased demand for post-payment services. In particular, the use of BNPL services has surged among low-income groups with weak payment capabilities in the United States. Affirm is a representative BNPL company in the U.S. Affirm has been providing this service since 2012, offering a payment service that allows installment purchases without credit cards at online shopping malls.

BNPL services were launched targeting 'Thin Filers' such as college students and housewives who have limited financial transactions. BNPL works similarly to credit cards in that the service provider pays the merchant on behalf of the consumer, and the consumer repays the amount. However, unlike credit card transactions, BNPL can be used regardless of credit rating and does not charge separate fees other than installment fees.

In Korea, BNPL services are being provided by some fintech companies through the financial authorities' regulatory sandbox system. The financial supervisory authorities have designated this service as an innovative financial service, allowing electronic financial companies to offer post-payment services. However, since proper regulations for provisioning for bad debts have not been established, there are doubts about whether fintech companies can properly manage risks such as delinquency management. Recently, in the U.S., more than 30% of BNPL users have experienced delinquency, and it has been reported that users have suffered credit rating downgrades as a result. Some warn that BNPL may encourage overspending among low-income groups and cause household financial distress due to delinquency.

However, from the perspective of domestic credit card companies and other credit finance firms, BNPL services can be a new business opportunity for revenue generation. Affirm utilizes a big data-based credit evaluation model to prevent consumer delinquency. Affirm has focused on accumulating basic consumer information to enable this service. Affirm charges installment fees differentially according to the level of credit risk and does not require delinquency fees. However, in case of delinquency, it manages default risk by notifying credit information service specialists of the delinquency, which negatively affects the consumer's future credit transactions.

The target customers of BNPL are likely to differ from the existing customer base of credit card companies. Most will be individuals with insufficient financial history who find it difficult to obtain credit cards. Recently, the operating environment for credit card companies has rapidly deteriorated due to the application of DSR by borrower for card loans, reduction in merchant fee rates, and increased funding costs due to base rate hikes. Competition in auto financing has also intensified, making revenue generation difficult. There is an urgent need to discover new sources of income. Given that credit card companies have long made great efforts to advance credit evaluation models, they have reason to be interested in BNPL services.

The key to the success of the Korean-style BNPL business lies in differentiated risk management such as delinquency prevention. Considering the domestic financial environment where personal bankruptcy is easy and some low-credit borrowers intentionally lower their credit ratings to benefit from low-interest policy financing, measures to prevent defaults are crucial for the success of this business. Credit card companies with experience in cash services and card loans targeting high-risk borrowers have a competitive advantage over fintech companies in terms of risk management. Ultimately, considering the capabilities of credit card companies that possess know-how in high-risk lending and credit sales, as well as advanced credit evaluation models, the possibility of success in entering the BNPL business is sufficient.

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University