Building on the momentum seen in the e-commerce space during the Covid-19 pandemic, the buy now/ pay later (BNPL) model is one of the fastest-growing segments in consumer finance, particularly in emerging markets. BNPL providers offer point-of-sale loans that consumers can repay in instalments over the course of weeks or even months. Charging little to no interest, these microcredit providers make profit via transaction fees paid by the retailer, offering increased sales and customer conversion in return. Highlighting opportunities in the space, in June 2022 US tech giant Apple announced it would debut its own delayed payment service, entering a market dominated by start-ups such as Sweden’s Klarna and US-based Affirm. That same month PayPal announced its own service, Pay Monthly.
In 2022 BNPL accounted for $2 out of every $100 spent in e-commerce, according to GlobalData, a UK consulting firm. With a global market value of $125bn in 2021, the segment is projected to exhibit a compound annual growth rate of 24.9% and reach $3.9trn by 2030.
While inflation and weaker consumer spending have weighed on companies’ valuations following the pandemic, the adoption of enabling regulatory frameworks and the BNPL model’s growth potential in emerging markets is likely to help it weather economic headwinds.
Financial Inclusion
BNPL allows retailers to access markets where finance options are less available, and increases the purchasing power of individuals and micro-, small and medium-sized enterprises (MSMEs). Because BNPL automates credit approvals, when integrated into online payments, checks are conducted in seconds and without face-to-face interaction. Thus, it is a good option for young, digitally literate populations in emerging markets with limited credit penetration. BNPL is also attractive for individuals without a robust credit history, often financing a shopper’s first online purchase. For customers, it lowers the debt risk associated with credit, while limiting the risk of non-payment or fraud through soft credit checks and underwriting.
The majority of BNPL’s growth has been in the business-to-consumer space, financing online purchases of goods that individuals might otherwise not be able to afford. Many start-ups, such as Egypt’s Valu, also offer point-of-sale loans for services such as health care, education and travel, as well as for conventional goods. Some start-ups specifically target the business-to-business space by offering a line of credit for MSMEs to purchase from suppliers, granting them more purchasing power and access to credit.
Emerging Markets
The share of adults in emerging markets who made or received digital payments rose from 35% in 2014 to 57% in 2021, according to the World Bank. Latin America became one of the fastest-growing e-commerce markets in the world during the pandemic, with retail e-commerce expanding by 37% in 2020, and is particularly attractive for BNPL.
Paying in instalments is well established in the financial culture of many countries, as are cash alternatives; in Brazil, consumers rely on bank slips known as boleto bancário in lieu of cash, while Mexican corner stores, such as OXXO, offer a voucher system for payments.
BNPL firms in the Middle East and North Africa have also attracted substantial investment in recent years. In August 2022 Saudi Arabia’s Tamara secured $100m in its Series B funding round led by Sanabil Investments. A participant in the Saudi Central Bank’s sandbox programme, the firm is targeting regional expansion. UAE-based Tabby also raised $150m in an August 2022 mega-debt funding round.
In a move to regulate BNPL products and services offered by separately licensed BNPL firms, the Qatar Central Bank (QCB) announced a set of regulations in August 2023, following the launch of its financial technology strategy in February of that year. The controls apply to both conventional and sharia-compliant BNPL goods, but for Islamic BNPL service providers, a sharia advisor must be approved by the QCB. Qatar is expected to launch its first BNPL provider, PayLater, in 2024.
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