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Credit-keen South Africans are driving the uptake of Buy-Now-Pay-Later payment platforms
Already a mainstream payment method in markets such as the United States, the United Kingdom, and Australia,South African consumers are increasingly embracing the use of an emerging interest-free financing option for the purchase of items they would otherwise be unable to afford.
Unlike traditional interest-applied credit payment models, the Buy-Now-Pay-Later (BNPL) fintech model allows consumers to pay for their credit purchases over time and interest-free.
While the US$60 billion BNPL market represented 2.6% of global e-commerce (ex-China) in 2019, RBC Capital Markets puts global BNPL growth at a compound annual growth rate (CAGR) of 28% to reach US$ 166 billion by 2023.
In the UK, the use of BNPL products nearly quadrupled in 2020 to £2.7 billion, reports the UK Financial Conduct Authority, while Australia’s A$900 million BNPL sector will likely see more merger and acquisition activity in 2022 as players consolidate to survive rising interest rates and intensifying competition, says S&P Global.
The Buy-Now Pay-Later model
The BNPL payment model allows consumers to pay for their online or in-store purchase over time, using predetermined, equal interest-free payments. Similar to the layaway payment model long used in South Africa, BNPL boasts one key differentiator: Consumers are able to secure their purchases immediately rather than having to wait until all instalment payments have been made.
How it works in practice
- Consumers make an online or in-store purchase at a participating retailer and opt for the BNPL option at checkout.
- If approved, which is communicated immediately, the consumer makes a small upfront down-payment, such as 25% of the overall purchase amount.
- The outstanding balance is then paid off over time (usually over 6 weeks) in a series of interest-free instalments. Conventionally, clients will pay an instalment on the day of purchase and then every two weeks thereafter; or will pay an instalment on the day of purchase and then on the first day of the following two months.
- Payments can be made via a check or bank transfer or automatically deducted from their debit card, bank account, or credit card.
“BNPL essentially only exists because it is designed to benefit all three parties involved: the merchants, the consumers and the lenders,” says South African financial solutions developer Finch Technologies founder Christopher Ball.
“Merchants are far more likely to make a sale and their conversion rate is far higher when using online BNPL platforms. Consumers generally buy more because they receive the product upfront and have the ability to pay it back interest-free over a period. A critical part of the BNPL ecosystem, lenders earn income from the transaction fees associated with purchases.”
Many retailers are increasingly turning to BNPL because it increases conversion rates by between 20% and 30%, and lifts average ticket sales by between 30% and 50%. The platforms are also attracting new clients to retailers they have not purchased from before owing to cashflow constraints.
BNPL providers benefit from two primary revenue streams: merchant commissions from retailers, which are a percentage of the sales fee from BNPL transactions, as well as interest rates and penalties applied should the consumer not meet their interest-free obligations within the stipulated timeframe.
Several BNPL providers, such as recent South African BNPL firm Float, have partnered with credit providers such as Visa and Mastercard to allow existing, pre-approved consumers to pay for purchases using their existing credit card. This, a new form of BNPL dubbed ‘over-the-top BNPL’, enables consumers to use existing, pre-approved credit to purchase on their existing cards.
“As Float, we don’t actually extend new credit to consumers,” says Float co-founder Alex Forsyth-Thompson.
“We work on the Visa and Mastercard rails to enable credit card customers that have a pre-approved credit facility to make payments within the available limit on their credit card. They then pay back the amount over time interest-free. We’re not issuing new credit, we are allowing consumers to use their existing credit in an interest-free way.”
This enables financially responsible behaviour by credit users, as they now only need to settle an instalment amount on their credit cards each month, as opposed to the full amount. It also offers an upside to traditional store credit in that there is no initiation fee, monthly account fee or late payment interest fees. Companies such as Float also adopt the risk of collection from the customer, ensuring guaranteed repayment to the merchant.
“Our job is to be a cashflow tool to help people manage their credit. We are constantly building out our network of merchant and retail partners. This is useful for ‘big card swipe’ items, such as sporting goods, electronics, furniture, and luxury fashion, which usually get people into trouble,” he adds.
Growth of BNPL in South Africa on the upswing
Given South Africa’s long (and sometimes dysfunctional) relationship with credit, it is unsurprising that consumers are being heavily drawn to the BNPL sector.
On the back of surged demand for BNPL products in South Africa in recent months, an April 2022 report by Research and Markets shows that BNPL payments in South Africa are expected to grow by 97.5% on annual basis to reach US$ 457.3 million by the end of 2022.
The study further anticipates gross merchandise value attributed to BNPL sales to increase from US$ 231.6 million in 2021 to reach US$ 4797.9 million by 2028, while CAGR of 48% is expected in the sector between 2022 and 2028.
Growth will be driven by pressurised household income levels, the rising price of consumer goods and an increasing preference for e-commerce-based payment methods among upwardly mobile millennials and Gen-Z’s.
“The global pandemic has also created the perfect environment for the growth of alternative payment solutions such as BNPL in South Africa. Economic instability in the last few quarters led to a growing interest among consumers for BNPL schemes.
“Consequently, the adoption of the BNPL products has surged significantly over the last four to eight quarters in South Africa,” Research and Markets asserts.
The steady uptake in the use of BNPL payment methods in the country has attracted global BNPL platforms looking to enter the high-growth SA market through mergers and acquisitions and strategic merchant partnerships.
In September 2021, Australia-based global BNPL firm Zip announced that it had acquired South African BNPL platform Payflex, outlining plans to boost the speed and scale of Payflex’s expansion.
Shortly thereafter, in November 2021, South Africa’s largest independent payment processor Adumo announced its partnership with TymeBank to extend the newly-launched MoreTyme BNPL payment offering to small and medium-sized enterprises in South Africa.
Payflex CEO Paul Behrmann told Techreport in March 2022 that Payflex’s online merchants – primarily small and medium-sizes business – are achieving up to 30% higher average order values on the BNPL platform, with consumers making larger purchases and thus driving significant revenue increases.
The South African BNPL sector saw further buy-in February 2022, when Mauritian financial services provider Weaver Fintech acquired an 85% stake in Cape Town-based fintech startup PayJustNow as it targets ongoing growth in the BNPL space.
“South Africans love credit, so the growth of BNPL here is no surprise. Our job is to enable responsible use of the credit that’s already available,” says Forsyth-Thompson.
BNPL as an inflation lever and the need for credit oversight
An effect of BNPL not yet well understood is its impact on interest rates in the markets in which it operates, as well as the possibility of it being used as an inflationary lever.
While relevant to larger-scale BNPL markets than South Africa, Ball suggests that interest-free installments on consumer purchases should drive up the demand for goods. Despite this increased demand, the supply of goods will remain the same – at least initially – thus driving up prices and, consequently, inflation.
“This sounds to me like a classic inflation-driving cycle,” he says, “particularly since we find ourselves in a strong inflationary environment. More money in the hands of the consumer will drive demand for a limited supply of goods.”
“However, for this to hold true, BNPL would have to be at such a scale that its impact on demand is significant in relation to the total supply of goods. In other words. BNPL would have to be a significant player in the payment space.”
Ancillary potential impacts of growing BNPL, such as inflation and its broader impact on the e-commerce and payments market, also emphasize the need for adequate oversight of the market by credit agencies.
While the domestic BNPL market currently operates under existing South African credit regulations, fit-for-purpose regulation of the sector has yet to catch up.
“While the aim of BNPL is to enable responsible consumerism, it is important that lenders report BNPL-related data to the credit agencies, as any type of unchecked consumerism can have dire consequences,” cautions Forsyth-Thompson.