Affirm, Afterpay, Klarna, Quadpay. These are some of the big global players in the buy now, pay later (BNPL) movement. They allow shoppers to purchase products online and pay in installments with nominal or no fees, and have become more prominent due to how the pandemic accelerated e-commerce market growth around the world.
Credit card companies have filled in this gap for a long time. But the problem is credit cards rely on exorbitant fees, leading people to debt in the long run. While the pandemic left many jobless, it taught millennials and Gen Zers — a growing demographic with more than $200 billion in spending power — the hard way of sorting out their debt issues. In turn, a number of them have become debt-averse and increased their demand for better financing options.
A 2020 poll carried out by Motley Fool surveyed 1,800+ people on why U.S. consumers use BNPL services. From the survey, 39% of the respondents said they used BNPL services to avoid paying credit card interest rates, while 16.3% said they don’t like to use credit cards and 14% said their credit cards were maxed out.
To millennials, there’s no incentive to own a credit card these days. A shift of preference to buy products on credit at the point-of-sale is on the rise; $680 billion will be spent by global consumers using online POS finance or BNPL over e-commerce channels by 2025.
Yet, as established players continue to have thousands of merchants and millions of users on their platforms, BNPL services are just picking up in Africa.
In a continent where debit cards (not credit) are prevalent, the upcoming players are primarily lending companies who have found a way to assess their customers’ credit risk via technology. Gathering data from partnerships with merchants, they use consumers’ shopping habits and purchasing power to drive their BNPL ambitions.
How these platforms assess credit risk
Last week, Nigerian digital bank Carbon introduced Carbon Zero, a product that lets customers 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 paid upfront. After that, customers can pay the remaining price over six months.
There are different reasons why such services hardly exist on the continent. For one, the country’s credit infrastructure is still a work in progress, and most of its citizens have limited purchasing power. So how does Carbon plan to assess risk?
The company started in 2012 as a digital lender. But it has since grown to become one of the country’s few digital banks providing different financial services to its more than 659,000 customers. With extensive experience and a track record of providing loans to Nigerians (in 2020, its loan disbursement volume was $63 million), Carbon has found itself in pole position to enter the buy now, pay later market with Carbon Zero.
“We do not believe that a firm without a track record of lending can provide a similar service, except they have a significant amount of capital to burn. Carbon has been lending in Nigeria for nearly 10 years, so we have a lot of credit history of our customers, and we believe we can assess new customers very well,” Chijioke Dozie, the company’s CEO, told TechCrunch.
Dozie says Carbon Zero hopes to be the embodiment of the promise made to its customers years ago to embed finance in their everyday purchase. But there’s a benchmark to who these customers are. According to the company, Carbon Zero can only be accessed by customers who earn at least ₦200,000 ($500) monthly, representing a small amount of the population.
The case of finding a market need and product-market fit was slightly different for Egyptian digital lending platform Shahry. In 2019, co-founders Sherif ElRakabawy and Mohamed Ewis, while running Yaoota — Egypt’s largest shopping engine and price comparison website — noticed that one of the most frequent requests they got from users was the option to buy products and pay for them later. Simultaneously, the Egyptian pound was experiencing devaluation against the dollar, thereby causing inflation.
The founders launched Shahry targeting the underbanked part of its young population to pay for products in installments, going head to head with the banks that offered similar services, albeit via credit cards.
“We’re currently the only buy now, pay later app in Egypt that offers a fully online service with no physical friction or paperwork from signing up to product home delivery,” the CEO ElRakabawy told TechCrunch.
While Shahry’s model does not require a down payment, it does require that users apply for virtual credit through their mobile app, which they use to buy 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 fully automated instant decisions.
Partnering with merchants and raising capital to compete
Depending on the vertical, BNPL helps merchants drive sales, increase conversion rates and improve transaction sizes at decent percentages.
On how it makes money, Shahry takes interests and commission fees from merchants — a method Carbon Zero adopts. Via Souq, Shahry has Amazon as an online partner, and ElRakabawy says the company plans to onboard hundreds of brick and mortar, and online, merchants later this year.
On the other hand, Carbon Zero launched with merchants that are top distributors of authentic electronics and gadgets in Nigeria. Although these merchants sell competing products, Dozie says Carbon doesn’t control the prices. The company is only concerned with financing the products as other necessities like product pricing, fulfilment and logistics is between the merchant and the customer.
“We have told merchants it’s in their best interest to provide the best pricing as we will not favour any merchant 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 company must have a functioning credit system and a large war chest. This is why the likes of Affirm and Klarna have raised billions, and Afterpay millions, of dollars in investments. While Shahry and Carbon don’t have those amounts to burn, they will make do with what they have, as is usual with most African startups — case in point, despite raising just $650,000 in pre-seed investment last year, Shahry claims to have been experiencing double-digit month-on-month growth.
But ElRakabawy reckons that financing these transactions have put a strain on the business even though the company is yet to scratch the surface of what could be achieved in the Egyptian market.
“The market is huge and still mostly underserved,” he said. “The demand is so big that we’re currently only capped by the amount of loan capital we can disburse.” In the coming months, the company plans to close a second round of funding from new and existing investors to meet the growing demand for its service.
Carbon might be looking to do the same as the company gears up for a Series B in the foreseeable future. However, what is top of mind for Dozie is not fundraising; it is how to tailor the buy now, pay later service, which has become a global phenomenon, to a harsh market like Nigeria.
“We see a lot of potential in the Nigerian market for Carbon Zero. We do not believe we can blindly copy other BNPL players like Affirm or Klarna because they operate in markets that have an established offline and online retail market,” he said. “Carbon Zero will not only adapt to its environment to offer payment experience in the retail space but also in other areas where customers need to spread payments — in travel, education, and healthcare.”