Beyond Payments: The Factors Driving BNPL’s Popularity
As buy-now-pay-later (BNPL) continues its rapid rise across Central Europe, Middle East and Africa (CEMEA), attracting consumers with zero-interest rates and simple payment terms, millions of consumers are gaining access to credit for the first time. It’s clear that BNPL has the potential to have a wide-ranging impact, with its ability to help families cover a range of costs, big and small.
“BNPL players such as Tabby, Klarna and AfterPay aren’t just offering users an easy, cheaper way to pay for things – they are changing the structure of the modern credit system”, explains Otto Williams, Head of Product, Partnerships & Solutions at Visa CEMEA.
How do BNPL payments work?
There are three stages at which consumers can pay for something in instalments: Pre-purchase, at purchase and post-purchase. The financing offered by BNPL is credit at the point of sale (at purchase), with BNPL players classified as direct providers, as opposed to banks, who provide consumers the option to break down larger-ticket items after they have been purchased using a credit card.
In the latter model, it is the consumer who shoulders the cost of the credit, whereas with BNPL, the merchant typically pays a commission fee on each transaction. It is a form of lending that allows consumers to split the cost of a purchase into multiple instalments, at low and, occasionally, zero interest rates. The BNPL model offers benefits to both parties: Consumers are given a simple, low-cost means of breaking up a purchase – even on lower-priced goods – while merchants can increase sales volume and conversion rates at checkout.
Why have they become so popular?
Fewer barriers to entry, lower fees and a seamless user experience are some of many reasons why BNPL services have gained popularity today. These services have continued thriving, with fintech startups across CEMEA attracting substantial user growth and investor interest over the course of the pandemic1. “Visa’s latest CEMEA COVID-19 Impact Tracker reports that more than 80% of consumers surveyed in the UAE and Saudi Arabia expressed a willingness to use BNPL services2. The European outlook on the industry is also substantial, with annual growth forecast to achieve 30.8% between 2022 and 2028”3, says Williams.
BNPL’s lower threshold of credit offering allows consumers to pay for a much broader spectrum of products and services. For example, electricity bills, health insurance and car servicing are all important services that can be paid for by BNPL across CEMEA, giving greater freedom and flexibility for budgeting over the short term.
Low and, in some cases, non-existent fees are perhaps the most significant attraction of BNPL services. The incentives for all parties involved in a BNPL transaction – the consumer, merchant, third party provider of BNPL services, and issuer – are set up differently than with credit cards, which bring high interest rates and fees for consumers who are only paying off their minimum balance. With BNPL, the penalties for missing payments are not as severe. AfterPay, whose operations span the US to Australia, also caps late fees at 25% of the purchase price, while Gulf-based operator Tabby, a Visa partner4, charges a fixed fee of $4 when an instalment is 15 days overdue.
From a merchant’s perspective, the ability to offer consumers the option to split their payment into three or four low-cost instalments increases sales volume and conversion rates.
BNPL and young consumers
While growth has been recorded across age groups, millennials and Gen Z have been particularly enamored by BNPL. Fewer barriers to entry, lower fees and a seamless user experience are some of many reasons why millennials and Gen Z are buying into BNPL services today. Saudi Arabia, a country with a large youth population, is expecting to witness annual growth of 81.2% in BNPL services, most of which is being driven by consumers under 37 years old5.
Credit card access, particularly for Gen Z, is another factor fueling BNPL’s growth among under-30s. As a financial product, credit cards come with more requirements to entry than BNPL services, which offer a relatively seamless onboarding process. This is very important for consumers who might be struggling to understand the terms and conditions of their agreements, be that with regards to fees, interest rates or rewards6. However, credit cards do offer a broad set of benefits that BNPL, thus far, do not: broader retail acceptance, easier return policies and a more generous set of rewards and benefits7. BNPL players have been busy partnering with merchants in a bid to improve the rewards offering for consumers, with exclusive discounts and cashbacks among the benefits offered to buyers availing BNPL services in stores and online.
These services, as a concept, have also benefitted from exposure on social media, with #bnpl videos across various platforms - attracting millions of views and feeding a consumer perception of BNPL as something trendy and cool, especially when players are using influencers to promote their offerings8.
What is Visa’s role?
“The keyword is access. Visa is enabling both traditional players and BNPL fintechs to provide an additional, flexible instalments payment option at the point of sale for consumers. Acquirers on the Visa network can activate instalments for any of their merchants who accept Visa cards. Our instalment solutions also ensure that payments remain secure, reliable, and equitable”, explains Williams.
While BNPL and other instalment-based solutions represent a lucrative opportunity for acquirers, issuers, merchants and fintechs, Visa is developing products that can benefit all parties in the ecosystem – including consumers, young and old. When making a purchase at an eligible store or online vendor, consumers will be presented with an option to make the payment through a Visa Buy Now Pay Later solution. Once an instalment plan is selected and the customer pays, their issuing bank will process the payment and convert it into equal monthly payments.
“The UAE was among the first CEMEA markets to launch Visa Installments Solution at the end of 2021. We have since focused our attention on Saudi Arabia, South Africa, Nigeria, Kenya, Botswana and Azerbaijan from January 2022”, says Williams.
What will the broader social and economic impact of BNPL be? For merchants – particularly small- and medium-sized businesses (SMBs) – BNPL offers an easy path to increasing sales. This is why Visa is working to enable issuers and sellers to provide an additional, flexible payment option at the point of sale for consumers, who are able to use their existing credit lines on their eligible Visa cards.
Consumers, meanwhile, are able to split their purchases into manageable payments. Simple terms and conditions, seamless interfaces and rapid approvals are also bringing people across CEMEA into the financial fold. For their part, issuers will need to continue adapting their offerings to compete with this relatively recent alternative form of credit.
“We believe instalment payments at point-of-sale markets will be very large with multiple winners. With the set of products that we are building, we aim to create the ecosystem to support any player, whether they are traditional financial institutions or Fintechs”, concludes Williams.
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1 Crypto and BNPL Are Top Middle East Fintech Trends: Visa Report: https://fintechnews.ae/11055/fintechdubai/crypto-and-bnpl-are-top-middle-east-fintech-trends-report/
2 Wave 4: Visa CEMEA COVID-19 Impact Tracker, September 2021
3 Europe Buy Now Pay Later Market Report 2022: https://www.globenewswire.com/news-release/2022/02/21/2388448/0/en/Europe-Buy-Now-Pay-Later-Market-Report-2022-Fintech-Startups-are-Entering-the-BNPL-Market-with-Niche-Product-Offerings.html#:~:text=Medium%20to%20long%20term%20growth,US%24%20860409.8%20million%20by%202028
4 Tabby announces partnership with Visa: https://www.zawya.com/en/press-release/tabby-announces-partnership-with-visa-vn7wutjr
5 BNPL culture on the rise among GCC Millennials, Gen Z: https://www.zawya.com/en/business/retail-and-consumer/bnpl-culture-on-the-rise-among-gcc-millennials-gen-z-pqwvdtnd
6 Why the credit card industry needs a tech upgrade: https://www.marqeta.com/blog/2021/04/08/why-the-credit-card-industry-needs-a-tech-upgrade
7 Buy Now, Pay Later or credit card: Which is better for you?: https://economictimes.indiatimes.com/wealth/borrow/buy-now-pay-later-or-credit-card-which-is-better-for-you/articleshow/86190295.cms?from=mdr
8 Why millennials and gen-Zs are jumping on the buy now, pay later trend: https://www.cnbc.com/2021/08/07/why-millennials-and-gen-zs-are-jumping-on-the-buy-now-pay-later-trend.html