Southeast Asia’s internet giants bet on ‘buy now, pay later’

Buy now, pay later services have picked up pace in Southeast Asia as a result of the Covid-19 pandemic. Grab Holdings Ltd., Sea Ltd. and GoTo Group are all offering their customers short-term loans to help them pay for a variety of products and services, including taxis, food delivery and beauty products. The most recent rollout of services in the region came in July, when GoTo launched a pay-later service called GoPayLater Cicil—which means “taking installments" in Indonesian.

The shares of Grab, GoTo and Sea, which are collectively worth around $60 billion, have fallen heavily this year. Grab and Sea are down around two-thirds since the start of the year. GoTo, which listed in April, has fallen 28% since its IPO.

The three loss-making companies hope the addition of buy now, pay later services will generate more business on their platforms, rather than make them money from the lending itself. But the switch means these large technology companies are now being forced to consider a question traditional lenders have faced for centuries: How do you figure out if your loans will be paid back?

Banks typically use a mix of credit scores, borrowers’ incomes and payment histories to reduce the chances of defaults. Grab, Sea and GoTo, which are offering small, short-term loans that are unsecured, are so far avoiding such cumbersome credit checks.

“In the absence of this financial information, buy now, pay later providers have to make decisions based on scarce or even unreliable data," said Yvonne Szeto, a vice president handling commercial and sales strategies at payment-processing company Worldpay from FIS.

The companies say they are managing risks by developing proprietary models to screen loan applications—with user behavior and data like past purchases on their services providing a trove of information.

“Nobody comes in with zero data—we have a bunch of user data on day one," said Hans Patuwo, head of payments and financial services at GoTo Financial. GoTo was formed from last year’s merger of ride-hailing platform Gojek and Tokopedia, an e-commerce company.

These companies have also adopted measures that in some cases appear stricter than credit-card payment requirements. Grab, which operates a superapp offering a range of services, says it would suspend an account if the user doesn’t make a payment for an overdue bill after being notified. It requires payment of an administrative fee to reactivate the account.

Grab’s nonperforming loan ratio was steady for the second quarter, in the low-single-digit range, Chief Executive Anthony Tan said on a conference call. He didn’t specify the exact number.

Some customers see those stricter requirements as a boon for financial well-being. Jakarta resident Theo Napitupulu uses services like GoTo’s GoPayLater for regular food deliveries and online shopping. He is able to borrow up to the equivalent of about $65 each month—a credit limit that has risen since Mr. Napitupulu started using GoPayLater three years ago. The platform wouldn’t let him make transactions once his spending reaches that limit. That protects Mr. Napitupulu from the slippery slope of overspending, he said.

“Sometimes I get out of control," said Mr. Napitupulu, a 26-year-old who works in marketing for an Indonesian bank. He also has a credit card, which he says he reserves for larger purchases.

The companies say limiting their buy now, pay later services to regular users is one way to reduce risks. Grab, which launched its PayLater service in 2019, only offers it to users who have been using the app for at least six months. They are partly assessed on their ride patterns and ranking in the company’s loyalty program. GoTo’s pay-later service, which charges a small monthly fee, is more likely to be offered to those who are already using the company’s GoPay digital-payment service.

GoTo’s GoPayLater Cicil service is only available to select users at the moment. The installment plan adds to the GoPayLater service, in which users pay for rides and online orders at the end of the month.

Grab’s lending in the three months ended June 30 more than doubled from a year earlier as more customers used PayLater. The total also includes loans to drivers and merchants that use Grab’s platform. The loans were mostly funded from the company’s balance sheet, said Peter Oey, Grab’s chief financial officer.

This story has been published from a wire agency feed without modifications to the text