Is the buy now-pay later model a victory for consumers or a potential debt trap?
Windalyn Goma, 31, has been using Buy It Now platforms in the United Arab Emirates to purchase household appliances and pet food since last year.
What the Philippine PR manager in Dubai likes about the BNPL model is that it allows her to make small purchases and spread them over two to four interest-free payments.
“I’m trying to stop myself from using credit cards now, so I use either cash or BNPL for all of my purchases,” she says.
“I have started canceling some of my credit cards because they have very high spending limits, which causes me to overspend. BNPL gives you a better sense of control over your finances.
BNPL is a type of short-term, interest-free loan that allows consumers to make purchases in advance, receive goods or services immediately, and pay for them in monthly installments later.
For example, if you are buying something in a store or online, you may be offered the option to buy now, pay later at checkout. If you’re approved, you usually make a small down payment at checkout. You will then have to pay the remaining balance in a series of interest-free installments.
The coronavirus pandemic has caused a change in consumer spending habits and accelerated the growth of online shopping. Global e-commerce transactions totaled $ 4.6 trillion last year, up 19% from 2019, according to a Worldpay report. BNPL accounted for 2.1%, or about $ 97 billion, of that amount. This figure is expected to double to 4.2% by 2024, according to Worldpay.
More than 10% of online shoppers in the UAE used the BNPL model in 2020 and that figure is expected to rise to 30% by 2026, representing more than $ 2 billion in consumer credit, according to data provided by Dubai-based management consultancy RedSeer.
BNPL suppliers are responsible for reminding customers of their payment due dates, Ms. Goma said.
“However, they don’t mention the consumer’s spending limit up front like credit card providers do. I discovered during a transaction that my BNPL spending limit was 3,000 Dh. I couldn’t make another purchase without making full payment on my previous loan, ”she adds.
There are a number of BNPL players vying for a share of the Middle East market, including Spotii, Postpay, Cashew, Tabby and Tamara. Australian Zip, a global BNPL platform, bought Spotii for $ 16.25 million in May this year.
“There is a general upward trend among young consumers of [an] aversion to credit cards, ”says Hosam Arab, CEO and co-founder of Tabby.
“People are fed up with high interest cards and the recurring fees that keep them from living with financial freedom. We see our primary users aged 25 to 45 with varying demographics. “
Tabby’s BNPL solutions are available to online and offline retailers to create omnichannel shopping experiences.
“Given the digital nature of the business, the implementation on e-commerce shopping platforms is a plug-and-play model. As a result, the traction on e-commerce is faster and more online retailers are offering consumers the option to choose from a BNPL solution, ”according to Sandeep Ganediwalla, managing partner in the Middle East and North Africa for RedSeer.
“However, BNPL as a point-of-sale financing tool is also offered in physical stores, but the majority of the demand for BNPL globally comes from online channels,” he adds.
While the average basket size tends to be larger when Tabby is in use, “we’ve seen the purchases vary from a Dh 6,000 couch to a Dh 60 lipstick and everything in between,” says Mr. Arab.
The BNPL provider has not set a limit on how much a customer can spend when using the platform. “We take responsible spending very seriously and perform real-time approvals for every purchase based on payment history, basket size and other factors,” Arab said, adding that the rates Tabby’s defects are minimal.
Tabby customers receive regular reminders before any payment is due to avoid missing them. If Tabby is unable to collect payments on the scheduled day, the customer cannot make further purchases using the platform until dues are paid, the general manager said.
“We charge a late fee of 15 Dh per day after a payment is due. If you have not reimbursed for another two weeks, an additional late fee of 30 Dh is applied. No more fees are charged. This structure works much better for consumers than credit cards that trap you in debt with sliding interest, ”he says.
Rival vendor Spotii also offers its services online and offline, including with major offline merchants such as Jashanmal and Jumbo.
As e-commerce continues to be a growing segment of retail spending, offline remains a relevant purchasing channel for consumers in the region and “therefore it is essential for us to be where we are. find customers, ”says Anuscha Iqbal, CEO of Spotii.
“The BNPL model is better suited for small everyday items compared to very large purchases. The model works best for lower order and higher volume trades, ”she says.
The payment model is easier for the younger generation to adopt as they are more digitally savvy and more averse to traditional credit.
“Payment defaults are relatively low with BNPL-based solutions in the region,” says Mr. Ganediwalla of RedSeer.
“The main reason is that ticket prices are significantly lower [Dh200 to Dh300] than a credit card or loan installments and over a relatively short period of time. Another mechanism for preventing payment defaults is the credit check carried out by BNPL’s service providers, ”he adds.
Contrary to popular belief, BNPL companies perform credit checks, says Ganediwalla. Any missed payment by consumers could potentially be reported and subsequently impact their credit rating, he warns.
“While this is not an imminent risk, BNPL service providers can resort to aggressive collection agencies if defaults increase,” he adds.
According to RedSeer’s research, around 50% of UAE consumers who use BNPL financing do so to avoid credit card fees.
BNPL also allows consumers to better manage their cash flow or buy a product they couldn’t afford at the time, says Ganediwalla.
However, the common criticism of the BNPL model is that it encourages people to spend more than they can afford and take on additional debt.
About 55% of 1,500 consumers surveyed in the United States said they tended to spend more ($ 312 on average) when using BNPL than other payment methods, according to an April survey by the Strawhecker Group.
Don’t be fooled into thinking this is something other than a different style of credit card, says Nathan McFarlane, founder of AskHelpWith.com.
“Watch out for additional charges in the fine print. These models contain many different fees, including late payment fees and additional fees for rescheduling payments, ”he cautions.
Consumers should read the terms and conditions in detail, says Carol Glynn, founder of Conscious Finance Coaching. Ask yourself if there are any hidden charges, administration fees, interest rates and what the penalties are for default, she adds.
“Default and non-repayment of amounts owed will result in financial penalties and fines and will affect your credit score,” Glynn warns.
There are no additional benefits for BNPL such as point accumulation, refund options, or the consumer protection insurance that credit cards often offer.
“It is important to anticipate when signing this type of agreement. If you don’t have the money to pay for the item now, where will you get the money to pay the installments? Mrs. Glynn said.
“Don’t think of it as an easy or casual loan. It has the same obligations as any other loan and must be repaid according to the terms of the credit provider. It may sound more relaxed, but it comes with late penalties and fines if the down payments are not paid. “
With BNPL’s marketplace being largely aimed at young people, “the combination of a young user with a lack of understanding of what they’re getting into can be a recipe for trouble,” according to McFarlane.
“This and the lack of a link between BNPL and centralized credit scoring systems could mean that the user could end up with multiple BNPL accounts. This cycle is often driven by young people who make impulse online purchases and then worsen their problems over time. “
Sellers also need to perform a certain level of due diligence and checks to ensure the customer has the ability to repay installments when they are due, Ms. Glynn said. Businesses need to have a backup plan such as credit card details that they can charge in the event of a customer default.
“Returns can also be a problem. If you are returning an item, it may take a lot of time and effort for the BNPL credit provider to acknowledge receipt of the return. This means you may have to keep paying for an item you no longer have until the problem is resolved, ”she adds.
Meanwhile, uncontrolled spending can offset consumer budgeting and cash flow and cause potential financial stress, Ganediwalla said.
Update: October 5, 2021 5:00 a.m.