Why is Gen Z ditching credit cards for 'Buy Now, Pay Later'?

The familiar sight of our grandparents purchasing furniture on instalment plans might seem outdated to many, but Gen Z has revived this concept – with a digital twist.

What emerged as a pandemic necessity has become their preferred way to manage money, fundamentally disrupting traditional credit systems.

According to the Consumer Credit Oversight Board (CCOB) Task Force, Malaysians made 77.3 million BNPL (Buy Now Pay Later) transactions worth RM6.2 billion in 2023 alone. More tellingly, the first quarter of 2024 saw 29 million transactions valued at RM2.3 billion – a clear signal that this wasn't just a passing trend.

The digital native advantage

For Gen Z Malaysians—now aged between 12 and 27 – BNPL wasn’t just another payment option. It reflected their values: transparency, immediacy, and digital integration.

Platforms like Shopee, Grab, and Atome had all embedded BNPL seamlessly into their ecosystems, it was clear that credit cards were outdated to this demographic.

In fact, the CCOB Task Force data showed that while BNPL users spanned ages from 21 to 45, Gen Z early adopters conributed much of the growth. Over the past 12 months alone, the CCOB Task Force had recorded 3.7 million BNPL account holders with at least one transaction, showing a strong adoption rate among younger users.

"The rising trend is attributed to increased demand and familiarity with the usage of BNPL," said Khazanah Research Institute Shereen Hazirah Hishamudin in a report titled 'Buy Now, Pay Later: A New Form of Financial Lifeline for Consumers, following the release of CCOB's data.

Unlike their predecessors, Gen Z's comfort with technology had fostered a unique ecosystem where BNPL providers compete to offer enhanced user experiences.

Beyond the major players—Shopee PayLater, GrabPay Later, and Atome—the Malaysian market had welcomed other innovative providers like Split and FavePay Later, each carving its own niche in this rapidly expanding space.

The reshaping of financial habits

What was fascinating was how Gen Z wielded this BNPL financial tool. According to the KRI report, transaction values typically ranged between RM40 and RM500, covering everything from retail purchases to food and entertainment.

This wasn’t just about buying luxury items; it was about fundamental changes in how young Malaysians budget and spend.

While traditional banks required lengthy credit histories and proof of stable income, BNPL providers reimagined credit accessibility. Their innovative assessment methods resonated with young users' circumstances and spending patterns.

As highlighted in the KRI report, the ease of access to BNPL services, combined with minimal credit checks compared to credit cards made these services particularly attractive to younger consumers. Globally, this shift mirrored broader trends.

Research and Markets projected the BNPL market to reach USD39.4 billion by 2030, growing at a substantial rate of 26.0%. Malaysia's adoption rate among young consumers reflected these international patterns, though with unique characteristics shaped by our digital infrastructure and regulatory frameworks.

Navigating challenges and opportunities

The rapid growth, however, comes with its share of concerns. KRI's research highlighted a particularly telling trend: users with credit limits below RM500 saw their utilisation rates increased dramatically from 85% in Q1 2023 to over 95% in Q1 2024.

As Hishamudin pointed out in the report, "While some argue that BNPL helps consumers manage their cash flow more effectively, the over-utilisation of BNPL among lower-income individuals can have several negative consequences."

Despite frequent criticism that BNPL posed greater financial risks than credit cards, the data showed a different story. While BNPL's outstanding balance reached RM1.42 billion by Q1 2024, it represented just 0.07% of total household debt, significantly lower than credit card debt.

BNPL's fixed installment plans, and its typically interest-free periods may provide better spending visibility compared to revolving credit card debt that compounds monthly.

However, the real risk wasn’t in the payment method itself, but in the potential for multiple BNPL commitments across different providers without centralised tracking – a gap that the CCOB Task Force was working to address through improved regulatory oversight.

The upside was that the industry's response had been equally proactive. Major providers implemented stricter credit assessment procedures and expanded their financial education initiatives.

According to the CCOB Task Force, these measures aimed to ensure sustainable growth while protecting consumer interests.

What is next?

The formation of the CCOB Task Force represented a balanced approach to fostering innovation while maintaining consumer protection. Their oversight provided crucial data about the sector's growth and potential risks.

The KRI report indicated that these transactions spanned the "Professional & Commercial Services, Retail, Amusement & Entertainment, Accommodation, Food & Restaurants, and Transportation & Automotive".

This broad range of applications suggested that BNPL wasn’t just a shopping tool – it was becoming integral to how young Malaysians manage their finances.

The key was in maintaining the delicate balance between innovation and responsible lending. The KRI report emphasised the need for "thoughtful regulation and consumer education" to ensure the sector's healthy development.

ith BNPL credit exposure rapidly increasing by 34% from RM1.06 billion at the end of 2023 to RM1.42 billion by Q1 2024, this balance became even more crucial.

This transformation in consumer finance wasn't just about replacing credit cards—it was about reimagining financial services for the digital age.

As Hishamudin concluded in the KRI report, "The Malaysian BNPL market needs to be examined in more depth, utilising microdata from BNPL providers and banking institutions to understand consumer preferences and spending behaviour better as well as their debt dynamics over time."

Ultimately, for Malaysia's Gen Z, BNPL represented their first real chance to build financial independence on their terms.

While accounting for only 0.07% of total household debt as of the end of 2023, its rapid growth and widespread adoption among younger users hinted the early stages of a significant shift in consumer finance.

The challenge now lies in ensuring that the innovative financial tool continues to evolve responsibly, serving the needs of young consumers and the broader economic landscape.

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