Buy Now, Pay Later (BNPL) is fast becoming a go-to payment method, offering a simple alternative to traditional credit. This model allows customers to get what they want immediately, but return the cost over time. It’s making waves in the Middle East, North Africa, and Pakistan (MENAP) region, a place where traditional credit systems have often felt distant for many.
In MENAP, where cash transactions have been the norm, BNPL is introducing a new era of financial freedom. The growth of BNPL startups in this region is an indicator of changing financial habits, fuelled by tech advancements, evolving consumer behavior, and a broader shift towards accessible credit solutions.
The journey of BNPL in MENAP is not just a tale of financial innovation but a narrative of how modern payment solutions are bridging the credit gap. The market for BNPL services in the Middle East alone is forecasted to skyrocket from $7.2 billion in 2021 to a whopping $89 billion by 2030, highlighting the vast potential and the escalating trust in such payment frameworks.
In this editorial, we will delve deeper into the BNPL sector, exploring the market dynamics, regulatory landscape, and economic implications as MENAP stands on the verge of a credit revolution.
The Rise of BNPL in MENAP
The emergence of Buy Now, Pay Later (BNPL) startups in the MENAP (Middle East, North Africa, and Pakistan) region is not merely a result of global fintech evolution, but a direct response to the unique financial landscape of the area. Historically, credit facilities were less accessible here compared to regions like North America and Europe due to factors like low financial literacy and a high percentage of unbanked or underbanked individuals.
Early Adopters Leading the Change:
The MENAP region, particularly the Middle East, has been quick to adopt BNPL services. Companies like Dubai-based Postpay have recognized the opportunity BNPL presents in bridging the credit gap and fostering financial inclusivity. Notable players like Tabby and Tamara have not only gained traction locally but also attracted significant investment, indicating a strong belief in the BNPL model’s potential in this region.
Addressing Regional Credit Challenges:
BNPL is helping to mitigate the historically low financial inclusion in MENAP, making short-term financing accessible and convenient. This is especially relevant in a region where, even in economically stronger areas like the GCC, around 22% of the population remains unbanked.
The low penetration of credit cards in MENAP contrasts sharply with regions like the US, where credit card penetration is around 70 to 75%. BNPL offers a customer-friendly alternative that has resonated well with consumers, especially those new to credit.
Evolving Consumer Behavior:
The shift in consumer behavior, partly driven by the pandemic, has seen an increased trust in online shopping and digital payment methods in MENAP. This shift provides a fertile ground for BNPL services to flourish. BNPL addresses the long-standing trust deficit around prepayment, offering a more appealing alternative to the traditionally preferred cash-on-delivery payment method in the region.
Enabling E-commerce Growth:
By facilitating payment flexibility, BNPL services are not only aiding consumers but also merchants who benefit from accelerated growth and increased customer loyalty. The BNPL model is contributing significantly to the modernization of cash-reliant economies in the region, further driving the regional boom in fintech and e-commerce.
Regulatory Environment and Challenges
As the BNPL sector burgeons in the MENAP region, it navigates through a relatively unchartered regulatory landscape. Unlike traditional credit systems, BNPL services have operated with a degree of “regulatory leeway” which has facilitated quicker scalability compared to other fintechs in the lending space. This is due to BNPL’s unique model where monetization comes directly from merchants, not the customers, thus not framed as lenders.
Evolving Regulatory Frameworks:
The Central Bank of Saudi Arabia (SAMA) has issued a BNPL permit for providers that do not charge fees or interest to customers. SAMA also published a set of BNPL-focused regulatory frameworks aiming to deter irresponsible spending and protect consumers from accumulating unnecessary debt by capping the amount users can spend with BNPL providers.
The main objective of these regulations is to ensure that the growth of BNPL services is aligned with consumer protection, maintaining a balance between innovation and financial stability.
Operational Challenges:
Rising interest rates pose a challenge as BNPL companies end up charging merchants higher repeat costs to cover their operating expenses. This makes the BNPL model more challenging to manage in a high-interest environment.
The regulatory frameworks, while necessary for consumer protection, could potentially hamper the agility and fundraising prospects of BNPL startups, especially if the regulations are rigid. More flexible and ‘lighter’ regulations are deemed better suited for the agile nature of BNPL startups.
The initial regulatory steps have addressed some global uncertainties around the BNPL sector, providing more clarity and, in turn, comfort to investors. However, there’s a concern that more stringent regulations might impact the fundraising prospects negatively.
Global Regulatory Trends:
Globally, governments are exploring BNPL regulation, acknowledging the need for a clear, comprehensive, and well-defined set of regulatory frameworks to foster a conducive environment for BNPL players to operate, yet ensuring consumer protection.
The regulatory milieu in the MENAP region is a double-edged sword for BNPL startups. On one side, it brings a structure and legitimacy to the burgeoning sector, while on the other, it brings operational challenges that could potentially slow down the pace of growth. Nonetheless, the steps taken towards regulation signal a maturing market and an acknowledgment of BNPL’s role in the modern financial ecosystem of the region.
Economic Implications of BNPL
The Buy Now, Pay Later (BNPL) trend is not just a fleeting phenomenon in the MENAP region; it’s a cog in the larger wheel driving economic transformation. Here’s a dive into the economic tapestry being rewoven by BNPL services in MENAP.
E-commerce Surge:
The rise of BNPL is intertwined with the exponential growth of e-commerce in the region. The convenience and affordability BNPL offers have further fueled online shopping. In the MENAP region, e-commerce growth stands at a CAGR of 18.4% from 2019 to 2022, outpacing the global rate of 16.6%. The e-commerce market in the broader MEASA region is projected to reach $148.5 billion in 2022.
Accelerating Digital Payments:
Digital payments have become the gateway to economic growth in MENAP, with BNPL playing a pivotal role. In 2021 alone, 60% of consumers in the region preferred digital payment methods, up 20% from the previous year. The adoption of digital payments is contributing to cross-border economic activities and is seen by authorities as a catalyst for economic prosperity.
Consumer and Merchant Adoption:
Over 50% of consumers in MENAP are expected to use BNPL services in 2022, and 36% of merchants already have a BNPL offering. Notable adoption rates are seen in Saudi Arabia (39%), Qatar (34%), and Egypt (28%) in 2021. The trend reflects a shift in consumer behavior and merchant strategies, aligning with the global move towards flexible payment options.
Stimulating Economic Activity:
The emergence of BNPL is stimulating economic activity by facilitating consumer spending. As consumers find it easier to manage payments, they are likely to spend more, driving up sales for businesses. This, in turn, stimulates economic activity, potentially leading to increased employment and business expansions.
Risk Mitigation and Consumer Protection:
The potential downside includes over-leveraging by consumers, which could lead to financial instability. However, proactive regulatory frameworks, like those initiated by the Central Bank of Saudi Arabia, aim to deter irresponsible spending while fostering a conducive environment for BNPL growth.
Global Investor Interest:
The region has seen a flurry of investments in BNPL startups, like the acquisition of Pakistani lending company Tez Financial Services by Swiss-based BNPL startup ZoodPay. Such investments signify global investor interest in the MENAP’s BNPL landscape, projecting a promising economic outlook.
Potential Risks:
Despite the optimistic outlook, there are concerns globally regarding the valuation and sustainability of BNPL companies, as seen in the valuation slash of Klarna and a significant share price drop of Australia’s Zip. Such occurrences may have ripple effects in the MENAP region, potentially impacting investor confidence and market stability.
Case Studies: Leading BNPL Startups in MENAP
The following case studies clarify the success of some notable BNPL startups in the MENAP region:
Tabby:
Founded in 2019, this Dubai-based BNPL startup has quickly risen to prominence. As of 2023, Tabby has secured a total funding of $130 million, making it one of the top-funded BNPL startups in the region. It has partnered with over 3000 online and offline merchants across various sectors, indicating a broad adoption of its services.
Postpay:
Also established in 2019, Postpay is part of the ongoing credit revolution in the Middle East. It has accumulated $63.5 million in funding. With backers like Afterpay and Touch Ventures Ltd, Postpay is well-positioned to continue its growth trajectory in the BNPL sector.
Tamara:
Launched in Saudi Arabia, Tamara has been operational for a little over a year and is already making significant strides. Although the exact funding amount is not mentioned, the startup’s rapid adoption indicates a promising future in the BNPL landscape of the MENAP region.
These startups showcase how the BNPL model is being embraced in the MENAP region. Their success stories reflect a broader trend of financial innovation, driven by a blend of technology, consumer demand, and an evolving retail landscape. Each startup, with its unique approach and market strategy, contributes to the burgeoning BNPL ecosystem, providing valuable insights into the region’s credit revolution and the potential of BNPL services.
Wrapping up
The Buy Now, Pay Later (BNPL) wave is more than a transient trend in the MENAP region; it’s a pivotal part of the ongoing credit revolution. The simplicity and convenience of BNPL services are unlocking new financial avenues for consumers and merchants alike. As we’ve seen, startups like Tabby, Postpay, and Tamara are at the forefront, demonstrating how innovative payment solutions can thrive in a region traditionally reliant on cash transactions.
The growth trajectory of BNPL startups in MENAP is a testament to the region’s readiness to embrace modern financial solutions. The synergy between technological innovation, consumer demand, and a supportive regulatory environment is fostering a conducive ecosystem for BNPL services to flourish. The regulatory frameworks being developed, although in nascent stages, reflect a proactive approach to ensuring consumer protection while nurturing innovation.
The economic narrative unfolding in MENAP, underlined by the surge in e-commerce and digital payments, is intertwined with the rise of BNPL. By facilitating easy and flexible payments, BNPL is not only boosting consumer spending but also catalyzing the digital transformation of retail and e-commerce sectors in the region.
Through the lens of BNPL, we glimpse a broader fintech evolution in MENAP, heralding a new era of financial inclusivity and digital empowerment. As BNPL startups continue to innovate and expand, they are paving the way for a more accessible and consumer-centric financial landscape in the region.