The next wave: buying now and paying later is exciting and worrisome
In February, when Ola *, a software developer’s phone fell to the ground and stopped working, he knew it was time to buy a new one. The only problem was that he didn’t have enough money to buy the iPhone 12 he wanted. He was torn between two options: getting a cheaper phone to use temporarily or finding a way to pay for the iPhone which costs 400,000 (~ $ 800).
After some thought he decided to buy a new phone. He asked a friend for a loan. The friend recommended that he try a Buy Now, Pay Later (BNPL) program.
So Ola * researched some of these programs. The first one he saw required him to repay monthly interest of 4.5%, which would result in the payment of interest of 27% in six months and 54% in 12 months. There was no way he would settle for that, so he kept looking until he finally made up his mind to use Carbon Zero, an offer from Carbon, a Nigerian digital lender. Carbon Zero’s promise was that consumers could shop online from Carbon Verified merchants and pay in installments at 0% interest.
Ola * found the phone’s Carbon Zero price comparable to other merchants, so he was able to buy his iPhone 12 and spread the payback over four installments over six months.
After his experience, he repeatedly recommended Carbon Zero to friends in similar situations.
The rave of the moment
BNPL’s popularity skyrocketed during the height of the pandemic due to the accelerated growth in online shopping. According to a report From Worldpay, the payment processing company owned by FIS, global e-commerce transactions totaled $ 4.6 trillion last year, up 19% from 2019. BNPL programs accounted for 2.1% ($ 97 billion) of that amount. This figure is expected to double to 4.2% by 2024, according to Worldpay.
How it works
Like loans, BNPL programs allow consumers to purchase an item for more than they could normally afford at one time and spread the cost of their purchase over monthly installments. For merchants, two factors make BNPL attractive: an increase in e-commerce adoption and a desire to reduce high cart abandonment rates.
How do BNPL providers make money? Vendors who do not charge interest on the refund often take a merchant’s share on each transaction. For example, Carbon charges merchants a 4-5% commission on the price of an item, according to a merchant familiar with Carbon’s process. Retailers are encouraged to accept this as it often leads to higher average order value and better conversion rates.
Some BNPL companies also generate income from late fees and interest on longer term payment plans.
Notably, BNPL startups raised a record $ 1.5 billion globally in 2020, according to CB Insights. By 2025, the sector is expected to reach $ 680 billion in transaction volume globally.
The Global BNPL wave is currently run by Affirm in America, Klarna in Europe and Afterpay in Australia. PayPal entered the industry last year. It also extends to Africa.
In September, Australian fintech Zip, acquired Payflex, a South Africa-based BNPL company, for an undisclosed amount, to strengthen its position in the South African market and across Africa.
The rise of African BNPL services like LipaLater and Specta by Sterling Bank as well as the expansion of Western businesses in Africa suggests that BNPL products are here to stay and will inevitably spread across Africa.
Risks and challenges
Pay-later plans are especially popular with Millennials and Gen Z shoppers, and one of the main criticisms is that they encourage these consumers to spend more than they can afford. There are also concerns about how easily people can get into debt, sometimes without even realizing it, as there are no strict credit checks.
BNPL was also compared to controversial payday loans that allow short-term borrowing, often at high interest rates. While BNPL is generally interest-free, some providers charge high late fees.
Due to the high late fees, hundreds of customers have filed complaints with the relevant agencies about continuing to be billed for purchases they returned or being hit by unforeseen charges.
Last year, nearly half of BNPL users in the UK aged 18 to 34 said they missed a BNPL payment, according to a Capco report of November 2020.
To reduce the backlash in the UK, last month Klarna started offering its Pay Now product, which allows customers to pay the full purchase amount at checkout wherever Klarna is available in the UK. Previously UK customers had to choose a BNPL plan when checking out with Klarna. A sign that even BNPL companies are aware that some consumers have an interest in paying for items all at once.
In Africa, there are other concerns such as the lack of an appropriate and comprehensive credit rating system as well as a fragmented identity infrastructure. What happens when consumers fail to reimburse? Which rating agency would take care of this?
In the midst of all of this, there are still Africans who think it is better to wait until you can pay for items in full in advance.
When asking different people about their preference for or against BNPL services, I got an interesting response from Esther *, a Nigerian content marketer, who said, “Why would I use BNPL? I only pay for the things I can afford.
It makes me wonder if BNPL programs are as useful as they seem in making Africans live beyond their means, or is Esther speaking from a point of view of privilege because she doesn’t wasn’t as stuck as Ola?
BNPL, like other credit facilities, offers consumers the opportunity to better manage their cash flow, but there is also the risk that the consumer will abuse this opportunity.
* Name changed to protect the identity of the source
Daniel Adeyemi Senior Editor, TechCabal.