Fintech companies providing deferred payment services in South Korea are caught in a dilemma. Due to the characteristics of customers using deferred payments, they tend to have a higher arrears rate than general customers, and as the arrears rate rises, they face scrutiny regarding their soundness, making it difficult to expand services.
The deferred payment service, also known as Buy Now Pay Later (BNPL), is a type of credit provision service offered by domestic fintech companies, allowing payment for goods to be made later. It can be used with a debit card without a credit card, and no interest or fees are charged separately.
According to the Financial Supervisory Service on the 11th, the arrears rate for the deferred payment services of three companies—Naver Financial, Kakao Pay, and Viva Republica (Toss)—is decreasing. For Naver Financial, which has the largest deferred payment balance, the arrears rate reached 2.73% in the first quarter of 2023, down from last year's 1.3-1.4%.
The same is true for Toss. As of the second quarter of 2023, Toss's arrears rate for its deferred payment service soared to nearly 8%, while it maintained the mid-1% range last year. Among the three companies, Kakao Pay has seen an increase in its arrears rate for two consecutive years, surpassing 2.6% at the end of last year. The arrears rate typically refers to the proportion of accounts receivable that are more than 30 days overdue from the payment date.
The problem is that fintech companies are reducing their arrears rates at the expense of losses. The three companies are forcibly lowering their arrears rates by selling or transferring receivables and are managing their arrears by directly contacting defaulters or allowing users to flexibly adjust their payment dates. Consequently, while the recent arrears rate has decreased, the payment balance has not grown. In the case of Toss, the payment balance has actually decreased compared to last year.
Industry insiders point out that without means to manage arrears, such as sharing defaulter information like other financial products, it will be difficult to expand services. The primary users of deferred payment services are low-credit individuals, and expanding services to them inevitably leads to an increase in the arrears rate. Traditional financial companies can manage arrears by sharing defaulter information with one another, which helps to prevent defaulters across multiple financial institutions.
However, financial authorities are not allowing fintech companies to share arrears histories of their deferred payment services. Although a revision to the Electronic Financial Transactions Act last year partially permitted the sharing of defaulter information among service providers, the industry points out that it lacks effectiveness as there are too few providers. An industry official noted, "BNPL has a limit that is too low, and managing the arrears rate is difficult, making it hard to promote the service actively," adding that "means to manage arrears must be introduced for business activation to be possible."