Buy-now-pay-later (BNPL) services is currently on the rise. Affirm, BNPL startups founded by Paypal cofounder Max Levchin, is preparing to go public in Nasdaq. Affirm previously has raised up to 1.5 billion funding with valuation up to 10 billion. This move put spotlight on the future potential of BNPL services.
In this article, i write about developing BNPL service, not for commercial products but specifically for warung. I believe this is also big potential specific for Indonesian market.
Previously, I wrote about warung and startups. You can read it here.
Warung and Cashflow Risk
Warung owners, like many others small business owners, typically dont separate their business and family finance. They use their daily warung revenue to pay for household expense, such as groceries and buying school books for their children.
On the other hand, warung has fast turnover of goods. Even faster if the warung are on the side of big street. Smaller warung can have revenue from 1 mio per day while bigger warung can have 7-10 mio turnover. With turnover like this, most warung will restock immediately if several goods are run out. Usually once or twice a week.
There is cash flow risk here. If warung owner has big financial expense at specific week, for example paying school tuition or medical bills, the warung might not have enough cash to restock.
No restock, means no goods. The warung will look empty, reducing the customer and revenue of warung owner and their family.
Paylater / Credit Line
Paylater or credit line will be useful for use case like this. Warung can get the benefit of restock and then pay it later when the goods already sold and owner have the money. Since warung has daily turnover, paylater loan should be on weekly or bi-weekly.
Since the loans are in a form of goods, not cash, it has minimal risk of side streaming / using the loan not as intended.
Behavior of restock now and paying later next week is not new. My grandmother was a warung owner most her life. She lives in rural areas in Blitar, East Java. When she started her business, she took the first restock at the distributor with no charge. Her distributor just give her all of the initial goods for free, asking requirements that she wont restock anyplace else but his. On the next week, my grandmother would pay for the first restock and then took another restock. The cycle continues going forward.
In Bahasa Indonesia, this is called bon gantung or hanging invoice.
Underwriting Criteria for Warung
Similar to other type of loan product, two things need to be assessed from warung owners : Ability and Willingness to pay.
Ability to pay
Measuring ability to pay is to measure the revenue turnover of their business. How much is their revenue ? how often do they restock ? how much amount for each restock ?.
Since most warung owners dont record their day to day revenue, best bet to get data to approximate this is through their distributors. The distributor know how much and how often are these warung buy from them. Now whether the distributor is sophisticated enough to record these data is another case. But big FMCGs such as Unilever is pushing digitalization of these warung through app. One of the end goal, is to get this granural data on each warung restock behaviour and revenue.
Modern warung startups such as Mitra Bukalapak, Grab Kios, Mitra Tokped and Warung Pintar also have these data. Since, their app is the main method for warung to order restock. However, since most of these app is quite new, in-app transactions might not fully reflect their whole restock behaviour.
I believe principals or distributors are in the best position to offer these paylater service. To increase sales and loyalty for their warungs.
Willingness to pay
Willingness to pay is quite tricky. In regular loan, this is measured by getting the data on how were the borrower’s past behaviour in taking a loan. Do they tend to pay ontime ? do they take multiple loans ? do they have history of not paying loans ?.
Conventional financial institutions have access to OJK centralized loan database to check this. There are also third-party vendors offering similar services.
However, if warung owners never took formal loan, they wont have history.
Repayment : Cash or Cashless
The loan in warung paylater is disbursed in goods, but owners still have to pay in cash. Now this can get tricky.
Smaller warung usually manned by the owner himself / herself. Their business is overwhelmingly cash-based. Customer paid in cash and owner turn that cash into goods again when they restock.
Online lending usually offer payments via transfer or through Alfamaret / Indomaret. But this could pose a problem, warung owner who dont / or cant use mobile banking need to run to nearest Indomaret/Alfamaret or ATM. Since they man the store alone, running to places means warung needs to be closed first.
Taking repayment in cash is not simple either. Its both risky and costly. But its more inclusive and friendly to the warung owners.
Risk Mitigation
One way to reduce risk is to give tiered loan ceiling. Warung owners, who already being assessed their credit worthiness, are given small amount of loans first. Then, if they repay the loan on time or in time, they can use the facilities again. After couple of good repayment history, warung owners can get higher ceiling.
Another aspect that can reduce risk is how much impact does the loan provider has to the overall warung owner business. For example, if the one who give the loan are the main distributor for the warung owner, loan risk is relatively low. Because if the warung owner dont pay, he will risk losing distributor and can be detrimental to his warung continuity. On the other hand, if the loan provider is not main distributor and warung owner can easily restock from other place, loan risk become higher.
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