Can “Buy Now, Pay Later” Model Unlock E-Commerce Potential in Emerging Markets?

By Oxford Business Group

Building on the e-commerce momentum from 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 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.

In June 2022 US multinational technology 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 BNPL service, Pay Monthly.

Last year BNPL accounted for $2 out of every $100 spent in e-commerce, according to Global Data. 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 company valuations post-pandemic, the adoption of enabling regulatory frameworks and BNPL’s growth potential in emerging markets is likely to help it weather economic headwinds.

Increasing financial inclusion
BNPL allows retailers to access markets where finance is less available and increases the purchasing power of both individuals and micro-, small and medium-sized enterprises (MSMEs).

Since BNPL automates the process of credit approval, integrating it into the flow of online payments, checks are conducted in seconds and without face-to-face interaction. It is attractive to young, digitally literate populations in emerging markets with limited credit penetration.

BNPL is especially attractive for individuals without a robust credit history, and the service often finances a user’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.

However, 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.

Trends in emerging markets
In emerging markets, the share of adults making or receiving 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 a well-established part of the financial culture in many countries, as are cash alternatives; in Brazil, consumers rely on bank slips known as boleto bancário in lieu of cash, while in Mexico corner stores such as OXXO offer a voucher system for payments.

In April 2021 Nelo, a fintech agency founded by former Uber executives, raised $3m in a seed round to begin offering BNPL services in Mexico. A recent alliance with Mastercard will allow Nelo’s services to cover all online commerce automatically, eliminating the need to make agreements with specific vendors.

Other prominent players looking to expand BNPL services in a region where 86% of payments are in cash include Colombia’s Addi, which has expanded to Brazil and is eyeing the Mexican market, as well as US-based start-up Alchemy.

Several markets in the Asia-Pacific region are set to see a BNPL boom, with digital lending balances projected to reach $116bn by 2025, according to a 2021 Google report.

GoTo, Indonesia’s biggest start-up, recently announced plans to offer BNPL loans alongside pre-existing services that range from ride-hailing to online shopping. Kredivo, Indonesia’s largest and fastest-growing BNPL player, is planning to expand into Vietnam, where the BNPL market is expected to surpass $1bn by 2028, up from $496m in 2022.

BNPL firms in the Middle East and North Africa have also attracted substantial investment.

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 sub-Saharan Africa, several local players are looking to expand BNPL options in mostly cash economies.

In January 2022 Kenya’s LipaLater raised $12m in a debt-and-equity bridge round, and in March of the same year Nigeria’s CredPal raised $15m in a similar expansion. Within the region BNPL is mainly used to finance expensive purchases such as laptops, electronics and cars, although there are emerging opportunities for peer-to-peer lending.

Challenges and regulation
As the segment grows, BNPL providers face increased competition and higher interest rates, which can cut into profit margins. Klarna − once Europe’s highest-valued fintech firm − saw its latest funding round close at an 85% lower valuation.

A slowdown in spending resulting from inflation and supply chain concerns is prompting many companies to weigh growth versus profitability, and the segment will likely see more consolidation and portfolio expansion.

Even so, international fintech players have begun to enter a space once reserved to start-ups, either through partnerships with existing BNPL providers or by expanding their own services.

Regulation will also play an enabling role, as BNPL services typically fall outside of existing consumer credit laws. In Malaysia, the central bank, the Securities Commission Malaysia and the Ministry of Finance are working to develop a consumer credit act this year that includes BNPL.

Other markets, such as Australia and Singapore, are opting for a voluntary code of practice, balancing consumer protection with support for continued growth. Potential regulations may include age and credit limits on BNPL lending; disclosure and fair marketing requirements; measures to discourage late payments and limit debt accumulation; and credit-information sharing to provide better understanding of customers’ finances.