BNPL growth in MENAP
eCommerce is surging around the world as consumers are increasingly choosing online channels. The COVID pandemic has accelerated online adoption in the MENA region as well. Research confirms that B2C eCommerce’s share of total retail sales in the UAE was the highest in the Middle Eastern region. As more companies have adapted to the digital landscape, we’re witnessing interesting financial innovation.
The development of Buy Now Pay Later (BNPL) solutions, which allows buyers to spread the costs of their purchases through interest-free installments, is an exciting one. The customer gets the product they want and chooses flexible repayment options ranging from 3 to 12 months while merchants benefit from high conversion rates and repeat purchases.
BNPL provider Klarna reported transaction growth of 45% between 2019 and 2020, which highlights the massive potential at hand. Here are the important trends we’re currently witnessing in the Middle East.
Growth Explosion
The MENA region witnessed tremendous growth in 2020. Tabby (UAE) is leading the pack with an estimated market capitalization of $32 million.
The MENA region witnessed tremendous growth in 2020. Tabby (UAE) is leading the pack with an estimated market capitalisation of $32 million. Other significant players include Tamara (KSA) valued at roughly $6 million and PostPay (UAE) valued at $5.5 million. There are as many as 10 service providers in the region, such as Spotii, Cashew, and Aramex SMART. Pakistan’s QisstPay and Shahry in Egypt are pioneers in their countries, offering easy credit access for eCommerce purchases.
While these firms are making an impact within their region, the world has begun taking notice as well. For instance, earlier this year, Australian BNPL provider ZIP announced a takeover of Spotii. Tabby has teamed up with New York’s Splitit to provide expanded BNPL tools and white label opportunities to customers. This strategic partnership introduces Splitit to the UAE’s $7 billion and KSA’s $11 billion markets. The partnership is also focusing on facilitating international payments.
BNPL’s exponential growth is closely tied to the inherent economics of its business model. A positive feedback cycle ensues when more merchants join a service provider’s network, which in turn leads to greater customer exposure. Thanks to viewing the service across multiple platforms, customers begin to trust the service and growth ensues. This growth leads to even more merchants signing up for the service and onward it goes.
This positive feedback loop gives BNPL providers more data to refine their algorithms which leads to better projections and reduced probability of loss. Merchants as a result receive better offers which they can pass onto the consumer. BNPL also offers a great alternative to cash on delivery which has been an impediment to eCommerce growth in MENAP. With all of these factors combined, it’s no surprise that the region is witnessing massive BNPL adoption.
Potential Credit Card Disruption
BNPL’s ability to provide short term credit could lead to an interesting side-effect. Thanks to underserved demographics such as students, the elderly and those with poor credit receiving credit access via BNPL, credit cards might eventually be disrupted. The major advantage of BNPL is that no hard credit checks are conducted before approval, unlike a credit card.
Consumers also benefit from interest-free periods where they can pay their balance within an elongated period. This option is convenient since it does not require additional applications. BNPL apps are easy to use, and customers can conclude their purchases almost instantly. Payments are automatically deducted, with instalments and timings predetermined.
Even financially well-serviced people are attracted to BNPL’s flexibility, despite these solutions currently offering fewer benefits than credit cards. For instance, BNPL providers do not currently offer anywhere near the travel or entertainment rewards that credit cards offer. However, thanks to the flexibility of paying later, consumers are increasingly using these solutions while paying.
Currently, it remains to be seen to what extent BNPL will disrupt credit cards. There’s no doubt that Pakistan will be well served by BNPL providers’ sophisticated credit evaluation algorithms. Banks in that region currently lack credit data to make sophisticated decisions. Adopting BNPL might reduce the risk on their books.
The MENA region has robust data collection but high credit card interest rates and opaque approval workflows might push consumers towards BNPL. There’s no doubt that the MENA region will follow global patterns and we’re excited to see whether providers such as Affirm or Klarna can compete with Mastercard and Visa.
Challenges
BNPL faces some unique challenges in the MENAP region. Globally, the service is marketed as an alternative to credit cards but given the region’s religious sensibilities, providers have been going to great lengths to avoid associating themselves with credit or interest. The result is that BNPL is being marketed as an alternative to Cash on Delivery.
While merchants would love to get rid of cash on delivery due to the additional costs it places on the eCommerce delivery chain, consumers love the flexibility it provides. Given its technological bent, consumers struggle to understand what BNPL entails.
Another issue is the manner in which BNPL providers are sidestepping the credit-linked connotations of their services. Currently, providers charge merchants fees instead of charging consumers interest. However, consumers can face harsh penalties if they miss a payment. This has led to regulators questioning whether the service involves credit management after all.
This is a grey area that we’re watching closely and there’s no doubt that KSA and UAE regulators may be taking steps soon. There are also a few traditional downsides of BNPL to watch out for. Consumers don’t pay interest on purchases, but they can end up paying higher rates as a result of non-payment before the end of the payback period.
BNPL can lead to overspending compared to credit card use which might lead to increased regulatory attention on how these services are marketed.
Despite these shortcomings, we look forward to future developments in this space with excitement. There’s no doubt that the exponential growth BNPL providers have experienced is not an anomaly and they’re poised to increase their global footprint. Thanks to strong infrastructure in the Gulf countries and government support, BNPL is poised to soar to greater heights.
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