In my last article, I looked into some of my recommended verticals within the Fintech space in Africa and provided justifications for my choices. As promised, I am back with part two! This is a bit of a lengthy piece.
Here, I explore the early-stage Buy Now, Pay Later (BNPL) sector in Africa, highlighting its major players and examining potential growth challenges the industry may face.
Let’s dive in.
What is the state of the sector? What are the opportunities?
The BNPL sector in Africa is nascent and still very much in the development stage compared to other developed markets like Japan, the US and Europe which have had this offering for years. Klarna, one of the biggest BNPL services globally, has been in existence since 2005. We can even say that BNPL has been long overdue in Africa. Its introduction was made more accessible by the onset of the COVID-19 pandemic and the sudden shortages in sources of income and sustenance for most people.
Despite this, there exists a lot of growth potential. The BNPL sector in Africa is projected to grow by over $7 billion in 2022. This fact is also contributed to by the increased digitisation and smartphone penetration across the Continent, making consumers seek newer and more convenient ways to make purchases with alternative financing options.
From the consumer point of view, BNPL makes sense in Africa, even more so than in other countries, because of the prevailing economic situation, resulting in higher inflation rates and declines in purchasing power. A worry for this sector would be the aversion Africans tend to have against incurring debt or purchasing items on credit. But the many tales of people falling prey to loan companies with exorbitant interest rates tell a different story, that this is not an aversion held too firmly and that can be overcome for the right reasons.
BNPL is even a more viable option than obtaining loans. In most cases, it has no bearing on one’s credit history and allows consumers to make purchases immediately but spread payments over time with no interest attached. In some countries like Nigeria, the BNPL method promises a path to ownership for people who cannot afford to pay outrightly, while in other places like Egypt and South Africa, with relatively better economies, it gives people a cushion by not allowing them to pay for things immediately.
The downside to this sector which has been most acknowledged is the rising indebtedness that may begin to be incurred and the risk to consumers. A possible argument against this is that looking at data from other jurisdictions like the UK might help consumers manage finance and make essential purchases as they are more likely to use BNPL for items they need rather than discretionary purchases.
Who are the different players in the sector?
a. Public Sector Players
i. Banking Institutions – like the National Bank of Egypt and other banking institutions partnering with Jumia and JumiaPay to offer a BNPL service to consumers at zero interest. This means other forward-thinking banks could see the opportunities in the sector and want a piece of it.
ii. Regulators – While regulations have yet to be seriously considered in Africa, a look at other much-advanced jurisdictions reveals that left unregulated, this may be an avenue of exploitation for consumers through a lack of education of consumers about penalties for defaults, the inexistence of a system to assess a purchasers ability to repay and the lack of restriction around accruing debts from multiple BNPL providers. This means regulators will have work to do in the sector.
b. Private Sector Players
i. Electronic payment platforms – like JumiaPay are partnering with BNPLs to take advantage of the opportunities by being used as a payment gateway. This means we could also see other payment processors jump into the fray through strategic partnerships. Stripe, PayPal and Apple are already doing this in other regions. Flutterwave also has Migo as an option on their payment gateway which helps customers essentially buy now and pay later.
ii. Credit card networks and issuers – As the African BNPL scene evolves, we may see major card networks and issuers like Visa and MasterCard enter strategic partnerships with BNPL companies in Africa, just as in the UAE, US and UK.
iii. Neo banks – such as Carbon with its Carbon Zero product are also taking a bite of the BNPL pie by acting as a direct competitor to other BNPL startups. We have also seen neobanks like Monzo, Upgrade and Revolut enter the market in their regions.
c. Another way to look at the sector is to examine the different players in the BNPL workflow.
i. The BNPL provider: The first player is the actual BNPL service provider, such as CredPal, Carbon Zero and Sympl.
ii. A financing company: The service providers may raise debt from external investors to finance the BNPL or partner with financiers such as Credit Direct, an FCMB subsidiary in the case of CredPal.
iii. Online and/or offline retailers: These are the merchants whose products are offered to customers on a BNPL basis. Startups usually would sign as many as thousands of merchants on their platforms.
iv. Traditional or alternative credit/trust score providers: Companies like Carbon, who have a track record of lending, have it relatively easy with the credit histories of past customers and a system for assessing new ones.
iv. Repayment channels.
What are the challenges faced by the sector and what are some risks?
Some of the challenges faced by the sector include:
- Identity Verification: in some economies in Africa, false or stolen identities are sometimes easily used, making it difficult for startups to properly ascertain and follow up with those who take out loans.
- Loan Recovery: the loan recovery system in most African countries is abysmal, making it difficult for startups to recover loans from errant customers. Also, the fact that, in some instances, loans are taken out to make small-sized purchases means that customers may get the sense that they can get away without repayment.
- The lack of a proper credit scoring system in Africa is another challenge providers have to deal with and figuring out what to do when customers default on repayments or the lack of a credit rating agency to report to.
Some risks involved include:
- The risk of defaults and missed payments by customers.
- The risk of multiple debts by customers across various BNPL providers is because credit information is not shared among lenders.
- Customers may become overburdened by debts through stacking (taking multiple loans to make purchases) or be exploited by the arbitrarily high interest rates of BNPL providers.
- The late payment fees imposed by providers and interests on longer-term instalment plans could prove too costly to some customers who may prefer to take out a loan to purchase outright.
What are some companies in Africa in this sector?
In the Western part of Africa, these are some major players:
Approach: Offers consumers the option to make purchases right away and make payments spread out in four instalments. The first instalment is made at checkout and the remaining spread over time with interest attached. Their focus is on nonessentials with higher margins, such as apparel, footwear, fitness etc. Also, plans to focus on education, travel and healthcare industries.
Competitive Advantage: They have a proprietary credit eligibility and fraud detection engine that helps them make informed credit decisions on customers, facilitate transactions, disburse to merchants and drive collections when due. Their choice to focus on education and healthcare is unique as most players focus on e-commerce.
Approach: Works as a B2C marketplace where customers buy goods directly from them and pay in instalments weekly or monthly for up to 12 months. Customers receive goods after the first half is paid. Consistent users have a feature where they can receive their items after the first payment for a three-month plan.
Competitive Advantage: Their focus is on letting consumers purchase directly from them instead of obtaining credit to make purchases. Currently have a wide range of products from smartphones to computers, and household electronics, and plans for expansion to automobiles. Contains an in-built independent credit check and KYC system.
Approach: Their focus is B2B, providing infrastructure to merchants who sell to customers. Their platform seems to serve as an aggregator for the merchants and consumers, they provide the financing while the remaining journey from purchase to delivery of items is between customer and merchant. However, BNPL is only available to salary-earning customers earning at least N200,000 monthly.
Competitive Advantage: Its partnership with Visa to issue Visa cards means customers can enjoy BNPL services anywhere a Carbon card is accepted. Their revenue is generated from late payment interests and commission fees from merchants.
Approach: Focused on providing infrastructure to merchants, so consumers use CredPal’s app or credit card to make BNPL purchases from partner merchants. They have a point-of-sale infrastructure that enables BNPL through a credit payment link, checkout plugin, or QR codes. Users can access credit from N5,000 to N500,000 and repay in instalments over 6 months at 4 – 9% interest rates.
Competitive Advantage: Their approach allows all kinds of merchants to accept BNPL options at the checkout.
Approach: Operates a B2B model where they connect retailers to global wholesaler brands and provides BNPL services to the retailers to be able to purchase more products from the wholesalers while merchants make payments in instalments at a 5% monthly interest rate. Has a proprietary risk scoring engine that uses retailers’ purchase history, previous repayment performance and other data points to predict creditworthiness.
Competitive Advantage: Unlike other BNPL providers with a focus on consumers, they focus on providing their over 100k retailers with the credit needed to enlarge their business.
In East Africa, these are some players:
Approach: Focused on helping consumers get ownership of goods through micropayments; daily, weekly and monthly. Provide these services for solar lighting products, smartphones, electronics and health insurance.
Competitive Advantage: Over 2 million customers, devices sold can be remotely accessed and locked where customer defaults on payments.
Approach: they have exclusive partnerships with certain retailers to allow consumers to pay in instalments with a monthly interest rate. They also have an API that can be integrated into e-commerce platforms to enable merchants to sell directly to consumers while remitting payments periodically.
Competitive Advantage: Has a proprietary credit scoring and machine learning system allowing consumers to sign up and get a credit limit. Also, has an API easily integrated into e-commerce platforms to enable BNPL.
In Southern Africa,
Approach: Works as a digital mall where consumers can search for products they wish to purchase and make payments over four interest-free instalments. Users are assessed in seconds for creditworthiness. They have also partnered with an alternative lender to provide capital to Payflex’s merchant base to fund their businesses.
Competitive Advantage: Largest BNPL provider in South Africa with over 1,000 merchants and 135,000 customers. The acquisition by Zip will provide them with the right technology to gather data and build creditworthiness.
Approach: Users make payments for goods and services in instalments over six months with no extra fees except when payment is missed.
Competitive Advantage: Fastest growing BNPL in Southern Africa with 180,000 customers, 2,500 points of purchase and 1,000 retailers. Has a system that determines shopper affordability, schedules automated deductions and sends reminders to ensure that shoppers do not miss a payment.
In Northern Africa,
Approach: Not just a BNPL provider but operates a system that helps consumers save their money and pay later by providing the consumer choices at checkouts that promote saving and match their income and expenditure.
Competitive Advantage: Fast-growing BNPL with capital to scale. Raised $6 million in seed funding after five months in existence.
Approach: Focused on digitising the FMCG sector in Morocco and Tunisia by allowing retailers to purchase from FMCGs and local manufacturers. Using data from their acquired company, Chari is able to assess the creditworthiness of unbanked merchants and then offer BNPL services to these merchants to make purchases and then offer credit to their end-users.
Competitive Advantage: Acquired Karny.ma, a platform that provides credit and bookkeeping services to over 50,000 merchants and 15,000 convenience stores providing credit to their clients.
Approach: The user applies for virtual credit via an app; the company determines creditworthiness and credit risk using algorithms and customer data. Users can then use credit obtained to make purchases on the app from different online shopping platforms and pay in instalments for up to 36 months while revenue is made from interest and merchant commission dees.
Competitive Advantage: Has a proprietary AI-based credit scoring engine. Shahry is the first BNPL in Egypt to offer fully online BNPL service with no physical paperwork or friction.
This was a bit of a lengthy but fun piece. I’m curious to see how the sector develops and how these startups fare in the coming years.