Unraveling the Dynamics of Buy Now, Pay Later: A Comprehensive Insight into Financing Options, RegionalOpportunities, and the Path to Long-Term Viability
BNPL payment options offer consumers the flexibility to divide their purchases into installments, often featuring a 0% annual percentage rate (APR) and transparent fee structures. This financing model spans from short-term “Pay in X” alternatives to more extended plans suitable for higher-value items.
In the BNPL 1.0 scenario, consumers engage in online or in-store shopping through a BNPL provider app. At checkout, they can opt for the “Pay in X” feature, allowing installment payments over a period of one to six months. Following user authentication, the BNPL provider conducts real-time credit checks. The provider then disburses the total purchase amount to the merchant, deducting their fees a few days later. Subsequently, consumers make monthly payments to the BNPL provider throughout the specified installment period. Failure to meet payment deadlines results in late fees, and persistent non-payment can lead to removal from the platform.
Moving to BNPL 2.0, which centers on longer-term financing with interest, consumers make purchases online or in-store through a BNPL provider app, typically for higher order values. The BNPL provider pre-qualifies consumers for a specific amount, and users choose a payment plan ranging from six months to multiple years. The provider pays the total purchase price upfront to the merchant, deducting fees shortly after. Consumers then make monthly payments to the BNPL provider, now incorporating a small interest component. The loan is either securitized or held on the provider’s balance sheet. Late payments incur fees, and persistent non-payment can lead to removal from the platform.
The BNPL market in MENA
Examining the BNPL market in the Middle East and North Africa (MENA), the forecast predicts a global BNPL Gross Merchandise Value (GMV) increase from US$ 433 billion in 2022 to US$ 960 billion by 2028. The Middle East emerges as a promising market due to the under-utilization of cards and the historical uptrend in e-commerce adoption. The Gulf Cooperation Council (GCC) region hosts local players such as Saudi Arabia’s Tamara and the UAE’s Postpay, Tabby, Payby, Cashew, and Spotii, along with Shari’a-compliant Taly from Bahrain. BNPL serves as a crucial financial inclusion tool in the region, with significantly lower credit card penetration compared to the United States.
Merchants, however, bear a cost, with fees ranging between 2 and 8 percent on BNPL transactions, surpassing the 1.5 to 3.5 percent paid on credit card transactions.
As the BNPL sector experiences substantial growth in the MENA region, capturing about one-third of fintech funding in 2022, platforms like Tabby and Tamara have not only achieved product-market fit but also benefited from favorable regulatory conditions. Yet, challenges loom ahead. The cost of living crisis and increased interest rates pose questions about the sustainability of BNPL startups. Mounir Nakhla, co-founder and CEO of MNT-Halan, notes a shift from a strategy of growth at any cost to a renewed focus on profitability, unit economics, and business fundamentals.
Concerns about the largely unregulated nature of the BNPL market have prompted discussions of potential legislation, similar to the draft unveiled in the UK, to safeguard consumers. The expectation is that such legislation will be implemented globally, including in the UAE and Saudi Arabia, where two BNPL permits were issued in May.
Looking forward, the BNPL sector in the region must prioritize sustainable growth. This involves expanding into new sectors, diversifying product offerings, and exploring strategies to optimize profit margins. Effectively assessing and managing risks stands out as a significant challenge to ensure the sector’s enduring growth.