Commercial interests should not trump financial prudence
Consumer spending is an important economic indicator when it comes to assessing the health of an economy.
Having strong consumer spending data usually indicates a growing economy.
Many strong developed economies like the United States and Japan place great importance on it as it is a forward-looking indicator.
Take the United States for example, consumer spending accounts for more than two-thirds of the country’s economic activity.
As for Japan, which has always been a “saving” nation, it has seen its household financial assets reach a record high of US$17 trillion (RM72 trillion), half of which is in cash and deposits. , in December 2021.
This contributed in part to years of stagnation due to declining consumer habits.
The decline has persisted for eight years now since its peak in 2014. Japanese government policy has always been to encourage consumer spending; therefore, all kinds of policies have been put in place to achieve such a goal.
This includes low interest rates (think zero interest for term deposits), direct distribution of spending vouchers, national trade events, and the elimination of sales tax, among others.
Yet the simplest sign that it is difficult to overcome the innate, frugal culture of the Japanese people was when direct cash donations to those affected by the pandemic did not stimulate consumer spending, but instead went to the savings of the people.
This has led policymakers to rely on increased digitalization to improve consumer spending.
Buy now, pay later
Technology has always been mankind’s great enabler, improving the quality of life, whether by providing more convenience, improving safety, protecting the environment and others.
So embracing technology to drive consumption is a natural progression.
Today, it is so easy to complete a transaction, often requiring only a single screen tap or card gesture. Immediately, the transaction is successful and our account is debited.
If only making money was so easy for people. Interestingly, the companies that have enabled such transparent transactions are those that seek to make immense profit through increased consumer habits.
These service providers or platforms have even rebranded the age-old concept of “debt-fueled spending” to the buzzword “buy now, pay later” (BNPL).
In the table, we can see the biggest names in the BNPL space, their respective valuation and their financial figures. None of them is in fact profitable but the valuation given by the market is exorbitant. Although their lofty valuations have cooled somewhat of late following the continued sell-off of tech and growth stocks globally, they are still an integral part of the economy where they are the main drivers of tech spending. consumption and the additive consumption of the masses.
One wonders how Afterpay, once listed on the Australian Stock Exchange, which to this day is still bleeding hundreds of millions, was acquired by Block Inc (formerly known as Square Inc) for a colossal price of 29 US$. bil (RM122.7bil) last year?
Is it purely market irrationality or was Block Inc cheated in the deal?
Debt fueled consumption
I have often been told by industry players, especially in the startup scene, that my long-term fundamentalist nature is not suited for the venture capital scene. The advice given by Goodwill is to look at tech companies beyond the prism of rational evaluation and focus on their utility.
So they would say that investing in a BNPL company and the space is essentially buying into people’s long-term, debt-driven consumption model.
While this may sound like a viable investment thesis, to me this is what I consider to be all that is wrong with capital markets. I interpret this understanding of owning or running a BNPL business to mean buying the fatal weakness of the masses who “live beyond their means” and claiming early participation.
The more people go into debt, the longer it takes to repay, the more profitable BNPL companies become. The success of BNPL companies is a premise for the misfortune of others.
Back home, we have a rather dominant e-wallet company that’s taken the storm with its 36% per annum interest charges for its GoPinjam micro-loan service. Touch ‘n Go, have recently drawn a lot of criticism from various parties, including politicians and consumer NGOs. Some have even written publicly to Bank Negara asking the authorities to intervene early on to prevent legal “sharking” activities.
Following public backlash, Bank Negara issued a statement that did not specifically mention Touch ‘n Go or its services.
While the statement assures that the central bank will monitor and take action if the opportunity arises, there was one line in their statement that was surprising.
It says “The bank would like to make it clear that it does not intervene in the pricing of retail finance products, which are business decisions of financial service providers (FSPs).
Today, Bank Negara is one of our nation’s most respected institutions, with the brightest minds and professionals charged with protecting the nation’s financial ecosystem.
While I am pro-business and pragmatic about economic policies, it is my humble belief that business decisions for the sole sake of a single FSP’s profitability should never be allowed to trump the need to maintain the financial well-being of the masses, especially the vulnerable B40s of society, the segment that GoPinjam would serve.
Vicious circle of debt
To be frank, I’m also the Touch ‘n Go e-wallet user and appreciate the convenience this platform offers in my day-to-day transaction needs. I don’t need to take out an excessive amount of cash or hit the ATM just to get through the day.
As a beneficiary of the company’s platform, I can see the need for them to find alternative sources of income to sustain and grow the business as a whole.
However, taking a shortcut to recouping costs and increasing profitability by charging exorbitant interest rates (even higher than the 12% to 18% allowed under the Lenders Act 1951) is a bit contrary to the rule. ‘ethics.
This will only exacerbate the vicious cycle of debt, especially in a time of post-pandemic and post-flood economic recovery, for those hardest hit.
Although Touch ‘n Go made it clear that they have their internal systems to check, as well as their willingness to comply with the central bank’s responsible lending guidelines, there is no need to leave a corner open for possible valves.
Financial prudence is the key to a happy life
Some honest and hardworking people, despite a lifetime of hard work, may not be able to qualify in the T20 category, for reasons that may not be their fault.
However, achieving high income status or accumulating great wealth has very little correlation with happiness in life. A rich man may not be happy, conversely a poor man may be a happy man. This may be due to different sets of expectations and levels of satisfaction.
So what really matters most is being able to get out of the middle income trap or be essentially debt free.
Of all the life goals I hear from my fellow working friends, most are hoping to achieve financial freedom. The very basis of this would be financial prudence.
Let’s all work for nation building, without being obsessed with increasing consumer spending at the expense of financial well-being. This is the least that mainstream fintech players should aspire to achieve.
Ng Zhu Hann is the CEO of Tradeview Capital. He is also a lawyer and author of “Once Upon A Time In Bursa”. The opinions expressed here are those of the author.