Buy now, pay later

Africa: BNPL is an innovation our industry needs to get right

By Olaoluwa Awojoodu, Airende Ojemogha, Garry Ottosen

Posted on September 1, 2022 12:51

 © Maxwell Hwayo, 52, shops at a grocery store in Harare, Zimbabwe, March 17, 2022. Picture taken March 17, 2022. REUTERS/Philimon Bulawayo
Maxwell Hwayo, 52, shops at a grocery store in Harare, Zimbabwe, March 17, 2022. Picture taken March 17, 2022. REUTERS/Philimon Bulawayo

Buy now, pay later (BNPL), a payment plan that allows consumers to make purchases and spread the payment over time is gaining ground in Africa. Factors such as a Covid-19-induced economic slowdown, the rise of e-commerce penetration and an increasing inflation rate have fuelled BNPL’s shift from a nice-to-have to an essential part of consumer life.

Now, Africans ranging from the young, banked, and unbanked are sourcing offline and online BNPL products to help spread the cost of small and big-ticket items involving food or fun —the beginning of a new normal.

According to Research and Markets, the BNPL industry is projected to hit US$7.2bn in African and Middle Eastern markets by the end of this year, with Nigeria’s poised to grow by 111.2% year-on-year to reach US$ 1.9bn in 2022. As Nigeria grapples with a foreign exchange crisis, the cost of essential goods and services is skyrocketing – eroding the purchasing power of many citizens across the country.

BNPL can help consumers manage finances amid a cost-of-living crunch while prices for household bills are soaring in Africa and beyond.

BNPL’s convenience adds to its merit

BNPL is an attractive form of financing for the unbanked, especially communities outside the formal financial ecosystem that make up 57% of Africans. Many countries in Africa, particularly Nigeria, Ethiopia, and the Democratic Republic of Congo – three of the most populous, present an enormous opportunity. DRC has a notably low banking penetration, with only 25% – 47% of banked adults across the country.

Today, even big-tech firm Apple is using BNPL services, entering the space with an offer of loans directly to consumers through a new credit card. Whereas in Africa, BNPL is much easier to access than to qualify for a credit card – banks require borrowers to have a considerably high level of banking activity to be trusted with the risk.

Kenya’s MKopa offers customers instant access to goods while building ownership over time through flexible micro-payments and agents in underserved areas. Other start-ups such as Zilla, CredPal, and Klump are providing BNPL checkout options to social media merchants and e-commerce platforms to reduce cart abandonment and customers’ inability to pay – offering new ways to pay later.

Challenges facing BNPL

BNPL has been criticised, despite it being human nature to want what we can’t afford. Some critics have said the BNPL craze is another credit rush led by venture capital funds, and when the bubble bursts, it could leave tremendous consumer debt in place—as credit cards continue to do in countries not limited to the US.

BNPL start-ups are taking a cue from the credit card-induced consumer debt in the US to build a different way of running credit. The fintech explosion in Africa has birthed a long list of companies providing sophisticated know-your-customer (KYC) API to help fintech know who users are. Most digital lenders also use these KYC plug-and-play APIs better to understand the user’s income band and transaction history. This is important as almost 500 million Africans do not have any recognisable legal identity.

Platforms such as Zilla and CredPal score users based on income and bank transactions, while others require half-payments and must repay between 7-30 days, bringing defaults to a minimum. Users are not given more credit extensions than they can afford, even if requested. Through sophisticated KYC processes evolving alongside developments in A.I, digital lenders and BNPL providers in Africa are making efforts to consolidate financial infrastructure – improving credit worthiness. This reduces the chance of BNPL increasing consumer debt.

However, BNPL has inherited pitfalls from its parent – traditional lending. The lack of information sharing between its lenders creates problems for businesses and a rapidly growing system—scarce information sharing blindsides lenders in a nascent system allowing users to buy from various BNPL platforms simultaneously. There is currently no way for the platforms to detect that many are serial spenders, defaulting on purchases of goods across platforms and running into unbearable consumer debt.

How to get BNPL right

Regulators must work with BNPL providers to formulate effective policies that enforce data-sharing between lenders. Collaboration among regulators is imperative to meet consumers’ needs for spending, while the importance of financial planning and health should become a more prominent debate.

Our sector could leverage BNPL as an opportunity to boost access to essential goods and services that promote entrepreneurship, self-reliance, and productivity. Rather than fintech firms becoming loan issuers for goods that consumers either do not need or can depreciate over time. We need to establish a regulatory framework where we share and learn from the mistakes of other markets. We have the chance to redefine the BNPL model with elements of traditional lending—such as how interest, late payment, issuance, and processing fees are charged. This would subject our sector to the same operational standards of instant loan companies and the regulations that safeguard consumers from loan sharks in the market.

We co-founded Yep to combine our expertise in digital economies, financial inclusion, and credit facilities in the US and Africa for the public good. As a San Francisco and Lagos-based financial super-app, we are positioned to deliver seamless financial services and solutions to all Africans.

We’ve seen first-hand the success of credit cards in the US and how weak KYC and regulation can quickly turn lives into atmospheres of debt. We believe that BNPL is an opportunity to create economic opportunities for businesses and first-time borrowers, but if we don’t create a toolkit for a growing sector, the people our products work to serve risk falling victim to mounting debt.

YEP! is a San Francisco and Lagos-based financial super-app focused on leveraging technology to deliver seamless financial services and solutions to all Africans.                                                                                           

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