Complex Made Simple

If BNPL is a fintech gimmick to get us to overspend, it’s paying off bigly

The buy now, pay later (BNPL) space has been a hot fintech vertical. It is framed as an interest-free alternative to credit card payments, but concerns are that it may encourage overspending

BNPL adopters happy to put down up to 25% of the purchase price, then pay off the rest in equal installments The BNPL payment industry in the UAE has recorded strong growth tabby’s app has more than 400,000 active shoppers, with 3,000 daily downloads

The buy now, pay later (BNPL) space has been a hot fintech vertical. It is framed as an interest-free alternative to credit card payments, but concerns are that it may encourage overspending and underplay the risks that customers are taking.

This has prompted a regulatory push in the EU.

But a look at recent mega-deals reveals the appetite for such a service.

Last August, Square announced that it would spend $29 billion to acquire Australian BNPL company Afterpay.  

Recently, PayPal decided to acquire Japan’s Paidy for $2.7 bn, and  Amazon closed a deal with Max Levchin’s Affirm, both in the BNPL field.

BNPL startups all over the world have been mushrooming. Europe-focused Scalapay raised $155 million, while Colombia’s Addi disclosed a $75 million extension to its Series B, totaling $140 million.

The BNPL is not restricted to buying online. It is extending to service-based offerings like HVAC repairs, plumbing, and many other consumer verticals.

How does BNPL work?

Merchants use BNPL options by partnering with fintech companies to whom they pay a fee in the hope that consumers will buy more if they can stretch out payments. Some banks and credit card issuers are offering their own versions of these deals.

Whether to stretch out payments for necessities or for big-ticket items, BNPL adopters are happy to put down up to 25% of the purchase price, then pay off the rest in equal installments over a mandated period that a BNPL service allows, without any fees or interest charges.

They are called short-term point of sale loans. And like loans, they come with risks such as fees and interest charges if you fail to make the payments in a timely manner, but more importantly, the risk of overspending on things you couldn’t afford to begin with.

In a survey last year by Cardify.ai, nearly half of BNPL shoppers said they increased their spending between 10% to over 40% when they use these plans compared with using a credit card.  

In the US, where this service is booming, over 40% of American shoppers have used a BNPL, according to a recent Credit Karma/Qualtrics survey, with the highest usage among Gen Z and younger millennials.

BNPL is now poised to disrupt the $8 trillion US credit card industry.

Online shoppers see a pay later button when they reach the check-out page on a participating retailer’s website. For those shopping in brick-and-mortar stores, participating retailers typically let you set up a payment option through an app on your smartphone.

A typical arrangement is to put down 25% of the bill and pay the rest every two weeks in three or four equal, interest-free installments.  

American Express, Citigroup, and JP Morgan Chase have launched installment plans for their cardholders, giving them the option of spreading large purchases into a series of payments when they get their statements. These programs generally carry a fee or interest charges that may be lower than regular credit card rates.

BNPL booming in UAE and Saudi

The BNPL payment industry in the UAE has recorded strong growth supported by the impact of economic slowdown due caused by the COVID-19 outbreak.

According to the Q4 2020 BNPL Survey, BNPL payment in the country is expected to grow by 52.6% on annual basis to reach about $510 million in 2021. BNPL payment adoption is expected to grow steadily at a CAGR of 17.8% during 2021-2028. The BNPL Gross Merchandise Value in the country will increase from $334.9 million in 2020 to reach $1.6 bn by 2028.

tabby, the BNPL provider in Saudi and the UAE, announced it has raised $50 million in a new equity round which values the company at $300 million. The announcement comes just a month after tabby raised $50 million in debt financing bringing tabby’s total funding to over $130 million in less than two years.

tabby integrates with retailer checkouts, enabling their customers to shop both online and at physical stores with interest-free installments.

Founded in 2019 by CEO Hosam Arab and Daniil Barkalov, tabby allows consumers to shop and pay in 4 installments at no cost. Today, tabby’s app has more than 400,000 active shoppers, with 3,000 daily downloads making it one of the highest-ranked shopping apps in the markets in which it operates.

The company recently launched its own cashback loyalty program which rewards users who shop using the tabby app with cash that can be used to pay off their outstanding installments or deposited into their personal bank accounts.

Saudi-based Tamara and UAE’s Spotii, Tabby, and Postpay all say the take-up has far exceeded initial expectations. And investors are paying attention. Tamara last month raised $110 million in debt and equity, a large amount for an early-stage Middle East start-up.

Australia’s second-biggest BNPL player Zip said it was buying the rest of the shares in Spotii it did not already own for $16 million.

There is no independent data available on the Middle East BNPL market which also includes Shahry in Egypt; all of the companies in the sector are early-stage start-ups and many only began operating last year.

Half of all purchases in the region are paid with card, while cash on delivery accounts for 40% of all online transactions with BNPL making up only 10%, Chief Executive Rayan Fadul told Reuters.

BNPL is still new to the region’s consumers who are wary of using a product they don’t yet fully understand, he believes.

Tamara, which is in Saudi and the UAE, says it has signed up over 1,000 merchants and that transaction volume has been increasing 170% month-on-month. Spotii, available in Saudi, UAE, Bahrain, and Oman, has 650 merchants on its platform and has seen transaction volume rise at an average of 90% month-on-month since it launched last year, according to Zip.