Propelled by the surge in e-commerce transactions during the pandemic, the buy now, pay later (BNPL) industry is gaining ground across Asia-Pacific in the past few years. From Japan’s Paidy to Singapore’s Atome, BNPL companies are redefining the consumer experience in the purchase of goods and services.

As its name suggests, BNPL allows consumers to take advantage of short-term loans at the point of sale for their purchases. Though normally interest-free, the financing business generates revenue for BNLP companies through transaction fees on merchants or late-payment charges on consumers. Unlike other payment methods such as credit cards, it’s relatively easier to get credit approval for BNPL transactions as there is no requirement for proof of income or credit history.

The outlook for the business is bullish. According to a forecast by FIS’ Global Payments Report, BNPL is expected to represent 12% of all payments in Europe and 9% in North America by 2025. In Asia, however, market share will probably be less than 5% over the next few years.

According to Mastercard’s New Payments Index, only 50% of survey respondents from Asia are comfortable using BNPL solutions. One major issue is trust, with 67% of respondents saying they will feel safer if BNPL companies are backed by a major payment network.

Several BNPL companies have taken note and are forging ties with traditional financial service providers. Atome, for example, has sealed partnerships with Standard Chartered and Mastercard.

Still, a number of challenges are facing the BNPL market in Asia, including a very competitive landscape in the region. “BNPL companies in Asean are incurring high expenses to achieve fast growth,” says Moody’s Investors Service in an industry report. “Competition in the sector is intense as BNPL companies are competing not only among themselves or with banks but also with other major digital platforms with established customer bases.”

The pressure on BNPL companies in Asia to turn a profit is increasing with many aiming to rapidly build their user base by investing in digital marketing and technology, according to Moody’s.

A relatively new and exciting payment method, BNPL needs to work harder to prove itself as a business model in a region known for embracing multiple digital payment options.