Affirm, Afterpay, Klarna, Quadpay. These are some of the major global players in the buy now, pay later (BNPL) movement. They allow shoppers to purchase products online and pay in installments with nominal fees or no fees, and have become more prominent due to how the pandemic has accelerated the growth of the e-commerce market around the world. .
Credit card companies have long filled this gap. But the problem is, credit cards come with outrageous fees, which leads people into long-term debt. While the pandemic has left many unemployed, it has taught millennials and Generation Z – a growing population with over $ 200 billion in purchasing power – the difficult way to deal with their debt problems. In turn, a number of them have become reluctant to take on debt and have increased their demand for better financing options.
A 2020 survey conducted by Motley Fool surveyed more than 1,800 people about why American consumers use BNPL’s services. According to the survey, 39% of respondents said they used BNPL’s services to avoid paying credit card interest rates, while 16.3% said they did not like using credit cards and 14% said their credit cards were at max.
For millennials, there is no incentive to own a credit card these days. A shift in preference to purchasing products on credit at the point of sale is increasing; $ 680 billion will be spent by consumers worldwide using online point-of-sale or BNPL funding on e-commerce channels by 2025.
Yet while established players continue to have thousands of merchants and millions of users on their platforms, BNPL services are only just beginning to expand in Africa.
In a continent where debit (not credit) cards are prevalent, the future players are mostly credit companies who have found a way to assess their customers’ credit risk through technology. Collecting data from partnerships with merchants, they use the purchasing habits and purchasing power of consumers to drive their BNPL ambitions.
How these platforms assess credit risk
Nigerian digital bank Carbon introduces zero carbon, a product that allows customers to purchase electronics and gadgets while paying in small installments at a 0% interest rate. However, before a purchase is made, a percentage of the total cost is prepaid. After that, customers can pay the remaining price for six months.
There are various reasons why such services barely exist on the continent. On the one hand, the country credit infrastructure is still under construction, and most of its citizens have limited purchasing power. So how does Carbon plan to assess the risk?
The company started in 2012 as a digital lender. But it has since become one of the few digital banks in the country to provide various financial services to its more than 659,000 customers. With extensive experience and experience in lending to Nigerians (in 2020, its loan disbursement volume was $ 63 million), Carbon found itself in pole position to enter the market. buy now, pay later with Carbon Zero.
“We don’t think a business with no lending history can provide a similar service except that it has significant capital to spend. Carbon has been lending in Nigeria for almost 10 years, so we have a great deal of credit history from our clients and we believe we can assess new clients very well, ”Chijioke Dozie, CEO of the company, told TechCrunch.
Dozie says Carbon Zero hopes to be the embodiment of the promise made to its customers years ago to integrate finance into their daily purchases. But there is a reference to who these customers are. According to the company, Carbon Zero is only available to customers who earn at least 200,000 ($ 500) per month, which is a small portion of the population.
The case of finding market need and product-to-market fit was slightly different for the Egyptian digital lending platform Shahry. In 2019, the co-founders Cherif El Rakabawy and Mohamed Ewis, while running Yaoota, Egypt’s largest shopping engine and price comparison website, noticed that one of the most frequent requests from users was the ability to purchase products and pay them later. At the same time, the Egyptian pound suffered a devaluation against the dollar, causing inflation.
The founders started Shahry by targeting the underbanked portion of its young population to pay for the products in installments, taking on banks that offered similar services, albeit through credit cards.
“We are currently the only buy now, pay later app in Egypt that offers a fully online service with no physical friction or paperwork, from registration to product delivery to home,” CEO ElRakabawy told TechCrunch.
While Shahry’s model doesn’t require a down payment, it does require users to apply for virtual credit through their mobile app, which they use to purchase products from Arab e-commerce giant Souq. The company determines creditworthiness using algorithms and a credit risk review based on customer data. The company is also working on an AI model for instant, fully automated decisions.
Partnership with traders and raising capital to compete
According to the vertical, BNPL helps merchants increase sales, increase conversion rates, and improve transaction sizes at decent percentages.
On the way he makes money, Shahry charges interest and commissions from traders – a method adopted by Carbon Zero. Via Souq, Shahry has Amazon as an online partner, and ElRakabawy says the company plans to ship hundreds of brick-and-mortar merchants, and online, later this year.
On the other hand, Carbon Zero was launched with merchants who are the best distributors of authentic electronics and gadgets in Nigeria. Although these merchants sell competing products, Dozie says Carbon does not control the prices. The company only deals with the financing of the products, as other necessities such as pricing, fulfillment and logistics of the products lie between the merchant and the customer.
“We told traders that it is in their best interest to offer the best prices because we will not favor one trader over the other. Customers can choose which Zero merchant they want to use and they will vote with their wallet, ”he said.
To embark on a BNPL journey, a business must have a functioning credit system and a large war chest. This is why Affirm and Klarna have raised billions and Afterpay raised millions of dollars in investments. While Shahry and Carbon don’t have these amounts to burn, they will get by with what they have, as usual with most African startups – for example, although he only raised $ 650,000. in pre-seed investment last year, Shahry claims to have seen double-digit monthly growth.
But ElRakabawy believes that financing these deals has put the company to the test even though the company has yet to scratch the surface of what could be achieved in the Egyptian market.
“The market is huge and still largely underserved,” he said. “The demand is so great that we are currently only capped by the amount of loan capital we can disburse. Over the next few months, the company plans to complete a second round of funding from new and existing investors to meet growing demand for its service.
Carbon could look to do the same as the company gears up for a Series B for the foreseeable future. However, what matters to Dozie is not fundraising; it is how to adapt the service buy now, pay later, which has become a global phenomenon, to a difficult market like Nigeria.
“We see a lot of potential in the Nigerian market for Carbon Zero. We don’t think we can blindly copy other BNPL players like Affirm or Klarna because they operate in markets that have an established online and offline retail market, ”he said. “Carbon Zero will adapt not only to its environment to deliver a payment experience in the retail space, but also in other areas where customers need to stagger payments – in travel, education and retail. health. “