A different kind of credit

Yaron Assabi

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In today’s tough economy, most consumers would tell you that if a retailer offered them an opportunity to ‘buy now, pay later’ with no credit charges for meeting their agreed repayments, they would practically bite their arm off to obtain the deal.

Recently introduced into the South African market, the concept of ‘Buy Now, Pay Later’ (BNPL) is designed to enable consumers to purchase high-value items, even when they don’t have enough money available at the time.

How it works is that someone wanting to purchase a R2 000 pair of trainers, for example, would be able to split the payment into four instalments of R500 each. They make the initial payment and the product is delivered to them, with the customer agreeing to repay the BNPL provider the rest over the following three months.

Yaron Assabi, acting CEO for online retailer Digital Mall, notes that the rapid digitisation of businesses, driven by the Covid-19 pandemic and the concomitant need for consumers to shop online, has led to an increase in both the number of new purchasers and the types of purchases being made.

“The overall negative impact the virus has had on the economy can only be mitigated by new approaches to purchasing,” Assabi says. “BNPL offers the potential to limit the virus’ detrimental effect on the economy by providing innovative new payment methods that reduce the impact that purchasing high-value items traditionally has on one’s wallet.”

According to Craig Duggan, commercial head at Transaction Junction, a fintech company that specialises in digital payment solutions, there are several players today making waves with BNPL offerings.

“I think it’s a great idea, as it effectively increases the spending power of consumers and should lead to e-commerce conversion rates growing. The average order value should also be positively impacted,” he says.

“In some instances, the industry is seeing an increase of between 30% and 60% in the average order value, while the sales conversion rate has increased by up to 20%. To put it simply, utilising the BNPL option effectively extends the capability of the credit card owner, increasing their capacity to spend by between 10% and 20% and in some cases, up to 30%.”

It’s imperative to focus on the economic aspects of spending to stimulate growth in SA’s lagging economy. BNPL certainly presents an opportunity to stimulate activity on this basis, notes Duggan. At the same time, he cautions that extending credit to someone who no longer has a means to service that credit is a risk that is further exacerbated when the consumer has more spending power.

It’s all about ensuring you have a good algorithm that can process the relevant data easily, and quickly deliver either an approval or a credit denial.

Reco McDaniel McCambry, Novae

US-based BNPL provider Novae agrees that the rise of BNPL services means increased revenues and broader competition for the marketplace. The company’s president and CEO, Reco McDaniel McCambry, suggests that, depending on the provider, e-commerce sites can now focus on selling higher ticket items completely online without hiring a sales team. This is because the upfront cost will either be zero or minimal.

“This allows the e-commerce sites to put more money into marketing to drive sales even higher, since this service increases conversions. At the same time, it benefits consumers, as they can purchase items they need without it affecting their cashflow a great deal,” states McCambry.

Were they to use a credit card instead, he indicates, the consumer would end up with a decreased revolving credit capacity. On the other hand, with BNPL, it’s essentially an instalment loan, allowing them to reserve the revolving credit they have available.

Assabi points out that providers of this service obviously need to make it easy for people to buy, but without exposing themselves to risk. While there are many ways for consumers to essentially borrow money – whether it is applying for a credit card or an extension on their bond – unlike these others, BNPL is typically interest-free.

“The real beauty of this approach is when you look at the big expense items – something like paying for a family holiday, once the lockdown is over. Purchasing something like this using BNPL would allow you to enjoy the holiday, while perhaps paying it off over a period of six months. That is how you maximise wallet share!

“Of course, it’s still credit, so don’t be irresponsible, by going online and buying a bottle of expensive whisky, just because you can.

“At Digital Mall, we understand BNPL to technically be a loan, so there are ramifications for non-payment or late payments, such as impacting on your credit score. Thus, if consumers use BNPL, it’s important to give them access to their credit score, and ideally teach them how to look after their finances better, so they can improve their credit score. For us, it is about giving the customer all the tools to ensure that when we lend to them, we do so responsibly,” he adds.

Novae’s McCambry notes that BNPL apps are able to gain a real-time view and understanding of the consumer's affordability profile and make an accurate recommendation of what they can afford.

“It’s all about ensuring you have a good algorithm that can process the relevant data easily, and quickly deliver either an approval or a credit denial.”

Duggan says that currently, BNPL is completely legal and works within the confines of an agreement for upfront payment, with instalments that follow thereafter.

“Fees are only charged in the event that instalments are missed. The product is only applicable to consumers who have debit or credit cards, and fees are generally obtained via the merchant agreement. While BNPL is not subject to the National Credit Act, the fact that BNPL does encourage increased spending has seen regulators starting to take more interest in the global phenomenon. We certainly expect further regulatory oversight, to ensure responsible spending comes into play,” he says.

South Africa’s Payflex was recently acquired by Australian BNPL player Zip, which is said to have recorded transaction volumes of $5.8 billion in FY 2021.

BNPL has made waves in the FinTech space, continues Duggan, and has taken the world by storm, with its adoption certainly spurred by the impact of lockdowns on economies and jobs.

“It provides an opportunity to increase people's spending power, but, at the same time, irresponsible spending is never a good idea. Impulse purchases can have a significant impact on individuals and society – so nuance and understanding of the pros and cons is vitally important.

“You can’t spend your way out of debt, and individuals with a poor measure of self-control can suddenly find themselves in a far worse position than before, if they rack up the spending in an irresponsible fashion. If spending can be limited to measures to ensure your household can continue with the essentials in a difficult period, great – but the last thing you want is the opportunity to purchase luxury items instead of essentials due to reckless spending,” he cautions.

Assabi notes that there is talk of growth of some 200% in this industry, adding that TransUnion undertook a recent consumer poll that found that 62% of consumers were impacted financially by the pandemic, and 87% of those impacted were concerned about paying their bills.

“This has been compounded by the collapse of parts of SA’s economy due to looting and rioting, further deepening the economic uncertainty. I think something like 1.4 million jobs have been lost since the pandemic’s start – so, it’s clear that consumers need to stretch their rands as far as possible.

“While retail patterns are constantly changing, I feel BNPL will be an important tool in our post-pandemic reality, as it’s a key method for helping people afford things, despite the current situation. At Digital Mall, we view BNPL as another great string added to consumers’ bows – and looking at the longer term, we believe it will become a very convenient way for consumers to shop, particularly for those high-value goods,” he says.

* This feature was first published in the October edition of ITWeb's Brainstorm magazine.