KUALA LUMPUR: The lack of transparency in "Buy Now, Pay Later" (BNPL) service providers' fees and charges, particularly late payment penalties and processing fees, is a major concern, an economist said.
IDEAS Malaysia economist and assistant research manager Doris Liew said the excessive fees can accumulate rapidly, causing customers who miss payments to encounter a swiftly increasing debt.
"Hence, the forthcoming Consumer Credit Act by Bank Negara Malaysia is a timely and necessary measure to establish a regulatory framework for non-financial companies that provide credit to consumers.
"The new act is expected to introduce much-needed safeguards to protect consumers from the pitfalls of unchecked credit provision," she told Business Times.
Liew said one of the key provisions of the new legislation requires BNPL providers to assess the affordability of their customers before extending credit.
"Another critical aspect of the new legislation will be the requirement for BNPL providers to provide greater transparency to their customers.
This will involve clearly disclosing the terms and conditions of credit agreements, including interest rates, fees, and repayment terms," she added.
According to the her, the new regulations will also likely draw parallels with the requirements in place for credit card issuance, where lenders are already required to conduct affordability assessments and provide transparent disclosure of credit terms.
"By extending similar protections to BNPL customers, Bank Negara's new act will help to level the playing field and ensure that all consumers of credit are afforded the same level of protection.
"The regulation is a positive step towards promoting a more responsible and sustainable credit culture in Malaysia.
"By introducing stricter regulations and safeguards, the act will help to protect consumers from the risks associated with unchecked credit provision," Liew added.
She noted that the rise of BNPL schemes has been linked to an increase in retail spending, which has consequently led to a concerning rise in consumer debt.
"A particularly concerning trend is the disproportionate impact of BNPL on low-income and less-educated individuals, who often prioritise short-term pleasure over long-term financial stability.
"This demographic is also more likely to deplete their Employees Provident Fund Account 3 to fund discretionary purchases, such as new phones or vacations," Liew noted.
She highlighted that recent data from Bank Negara emphasises the seriousness of this issue, showing a 17 per cent increase in overdrafts among BNPL users in the fourth quarter of 2022 (4Q22), which is notably higher than the 7 per cent growth seen the previous year.
"This trend warrants close attention from policymakers and financial regulators, as it may exacerbate existing social and economic inequalities.
"The pervasive lack of financial literacy among low-income individuals perpetuates a cycle of unsustainable financial spending,"
Liew pointed out that the easy access to BNPL schemes encourages reckless spending, worsened by consumerist messages on social media and aggressive marketing tactics.
"Attractive promotions, like discounts and zero per cent interest rates, often mislead consumers about the true costs involved," she added.