Opinion: Is ‘buy now, pay later’ a model for the masses?

As news of the Square acquisition of Afterpay became public earlier this month at a hefty $29B and Dubai-based tabby’s $50M Series B round was announced at a valuation of $300M, two thoughts crossed my mind. 1) It’s amazing to see a digitally native fintech have the muscle to acquire a company like Afterpay to further its business lines. This speaks to the shifting nature of how we define finance & banking. 2) It got me thinking a bit deeper about one of the hottest FinTech sectors in MENA and beyond right now, Buy Now, Pay Later (BNPL), and the impact on the consumer.

Point one is an interesting one, and worth diving into how this compliments Square as a business and partner to both merchants and customers, but I wanted to spend this time on the second point.

For those that do not know, the concept of BNPL is simple. The BNPL provider will pay the merchant for you (typically an online merchant), and you’ll repay the provider over a predetermined number of months. An offer you may see is 4 equal payments over 4 months with 0 percent APR. Generally, the interest hits after 4 months if you don’t pay off the entire balance and you could be hit with a late payment fee, but providers of the service say that it alleviates the financial pressures that are created with credit cards. BNPL providers have various idiosyncrasies in the offerings and industries they serve, but that is the general gist.

The benefit of BNPL to the providers is clear. It’s a viable business model and a different spin on what banks do: borrow at one rate and lend out at a higher rate. The benefit for retailers is also clear. There is enough data now to suggest that offering alternative finance options leads to higher AOV (65 percent increase), sales (15 percent increase), and a decrease in cart abandonment by 25 percent. All vital metrics to any e-commerce business.

But, what about the consumer, the ultimate end user? Is BNPL actually helping consumers or is it a traditional credit card product with a fun-to-say new name and acronym that is propagating spending on discretionary items? The majority of places I see a BNPL option is on e-commerce sites for lower ticket items usually reserved for credit card purchases. In fact, a Cardify.ai survey shows that 66 percent of respondents used BNPL on “want” items they might not otherwise have purchased.

In the MENA region, BNPL startups are significantly on the rise, collectively raising over $200M in pre-seed to Series B stages from January 2020 (and this does not include debt raised). Traditionally, the regional population has been underserved from a credit card perspective with Cash-on-Delivery (CoD) dominating e-commerce sales pre-pandemic and dropping significantly during the pandemic (the UAE witnessed a 75 percent drop in CoD payments).

The shift speaks to the unprecedented level at which digital transformation occurred during COVID, which was a win-win for the Fintech industry as a whole and BNPL as a sub-sector. BNPL alternatives provide regional customers with the option to pay once delivery has been made, eliminating the need for a credit card pre-delivery or cash-on-delivery to a population that has been doubtful of paying for goods before receiving them. However, because of BNPL provider pressures from investors to show volumes and lack of regulatory oversight, the underwriting standards are far laxer compared to credit cards. This results in lower tier borrowers being approved and offered debt usually on the spot.

While such a concept can and has created a seismic shift away from traditional payment methods in a historically cash-driven region, two questions arise that I do not fully know the answer to: 1) Should consumers be given options to buy discretionary items that they cannot afford to buy with a one-time payment? 2) what percentage truly cannot afford it?

Over the last two years, Cardify.ai found that 43 percent of BNPL users have paid a late fee. The data is not clear on whether that is because of affordability issues or lack of proper servicing in this new industry. The BNPL phenomenon has not yet gone through an economic downcycle, but the lack of underwriting standards and regulatory oversight is concerning, and I believe a risk to the industry.

Now don’t get me wrong, I do see the value in BNPL. In fact, I recently used it to buy a refrigerator (18 months 0 percent APR). I think there is a time and place for this type of product, but how sustainable is such a model with its lack of overall regulations? I believe there need to be controls around the type of products BNPL should be available for and the underwriting standard used.

I started writing down my open questions on this space after seeing the Afterpay acquisition and tabby funding and thought it would be interesting to publish to spark conversation on this space. Would love to know your thoughts on whether or not BNPL should be available on all products on the internet? Or should it be reserved for life’s more significant purchases?

Simon Tkachenko

Partner at Modus Capital, an early-stage VC that invests in tech startups in MENA. Simon can be reached on LinkedIn.

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