In recent years, “buy now, pay later” (BNPL) has grown from a niche payment method to an industry worth hundreds of billions of dollars. Companies such as Klarna and Afterpay allow customers around the world, and particularly in the United States and Europe, to buy items whilst paying only a small upfront deposit. The bulk of the cost is then paid in instalments, often without any additional interest payments.
With sub-Saharan Africa being one of the fastest-growing consumer markets in the world, many consumer financing start-ups are looking to take a share of the potential African BNPL market. Goods purchased using BNPL were forecast to reach US$325 million in Nigeria alone by the end of 2021, and $1.195 billion by 2028.
Fehintolu Olaogun, who founded BNPL company CredPal in 2018, believes sub-Saharan Africa will follow other regions in experiencing a rapid growth in the adoption of BNPL. The Nigerian-based company recently closed a $15 million funding round to support expansion into countries such as Kenya, Egypt, Ghana and Cameroon. Olaogun spoke to James Torvaney to provide some insight into the BNPL industry in Africa.
Give us an overview of the BNPL industry and why you believe consumers in Africa will be quick to adopt it.
For a long time, Africa didn’t have a sustainable consumer credit ecosystem. Most Africans had to make payments in full, which reduced their ability to buy things they needed.
But with BNPL, we are able to allow them to split those payments into fixed monthly instalments. And the customer is able to buy what they need much more conveniently.
For example, imagine a child wanting a laptop to learn programming skills, but his parents aren’t able to pay the full cost upfront. Normally they would miss out on the opportunity, but with more flexible payment options it becomes easier to purchase.
What does CredPal’s BNPL product look like from the customer’s point of view?
When a customer goes to a merchants’ site, or visits a physical store, and reaches the point of payment, BNPL with CredPal is presented as a payment option, alongside existing methods such as cash, card, or bank transfer.
After selecting BNPL, the customer then goes through the CredPal gateway. There is a brief credit check, and the customer must pay an upfront deposit – usually 25% of the overall price – using a typical payment method such as a bank card or transfer.
With CredPal, they then have two options. They can either pay the balance within 30 days, or pay in regular instalments over a period of two to six months.
Does anyone ever get rejected for the loans? What happens then?
Yes, that does happen occasionally based on a number of factors. An example of such a factor is income level. If a person’s monthly income is 100,000 naira he will not be able to buy an item that will require him to pay 130,000 naira monthly.
Also, people who provide false information or misrepresent themselves are rejected. This happens because they pose a risk to not just our existing customers but to the business as well. So, with the necessary identity verification process, we’re able to run through the information provided and reject fraudulent applications once we confirm any misrepresentation.
How does CredPal make money?
BNPL companies generally have two main revenue streams.
First, there are merchant commissions. This is a percentage of the sales fee that the retailer pays us when a sale is paid by BNPL. Just like they would pay a commission if the customer uses PayPal or a credit card.
Secondly, there are interest rates and penalties. Because we earn revenues from merchant commissions, CredPal charges 0% interest for shorter repayment periods. However, for longer terms (two to six months), we do charge interest. And if you don’t pay on time, interest and late fees kick-in. There are some BNPL companies that only make revenue through interest, as opposed to merchants fees.
If they are paying fees, what is the incentive for a retailer to offer BNPL as a payment option to their customers?
The pitch to retailers is that with BNPL you are able to make more sales because people that otherwise wouldn’t buy your products, are now able to do so.
What are customers’ existing options for consumer credit? What is wrong with those options?
What we’ve had before are instant cash loans with apps like Branch and Tala. But if you just disburse money to a person without having control over what it’s used for, many people use it for things like gambling or partying. And because of this the default rates on cash loans are sadly very high.
BNPL on the other hand is a lot more sustainable, because we can control how the money is being spent. It is not like with a credit card or a cash loan where you can take the money and spend it on gambling, for example. With BNPL the customer can only spend on items from merchants that we have approved.
Our non-performing loan rate is more than 50% lower than the prevalent rate on instant cash loans.
What about credit cards?
I still believe that credit cards, if used well, can be an important part of the credit ecosystem. The biggest challenge with credit cards is the distribution. If I want to sell 1,000 credit cards, I have to spend on marketing so that 1,000 individuals sign up for the cards. But with BNPL, I can sell to one merchant and that merchant can give us 1,000 customers without us doing any additional marketing. So, in that sense, BNPL has a much lower customer acquisition cost than other forms of credit.
So, who is taking the risk of default on the loans? Are you using another credit provider to extend the credit to the customer?
The merchant receives the money in full at the point of sale, and we bear the risk of collecting from the customer. It’s a hybrid model where we are at various times the broker and provider of the credit. We also work with other lenders who provide us with debt to facilitate these transactions.
Describe some of the patterns you see in the African BNPL market.
In more developed markets there is a lot more impulse buying, so sectors such as fashion are more prevalent when it comes to BNPL.
In the Nigerian market particularly, it’s kind of the opposite. People want more functional items that are going to have a bigger impact. Electronics are by far the biggest category: laptops, smartphones, televisions, and appliances. Our average purchase price is around $400.
What kind of retailers use the service?
We’ve onboarded more than 4,000 merchants so far, so there is a wide range of retailers. These include fully digital ecommerce stores, as well as more traditional brick and mortar stores. Our merchants include everything from large supermarkets, such as Shoprite, to appliance retailers like Samsung or LG.
There is a growing number of players in the BNPL industry in Africa, including Carbon Zero, CDCare, Shahry, Lipa Later and Klump. What differentiates CredPal, and are you concerned there are too many competitors?
The BNPL market is quite challenging in Africa. I think there is going to be some consolidation in the market.
One advantage we have is that we have been operating since 2018, so we’ve gone through different cycles in terms of risk exposure and managing defaults. We’ve also developed a scalable BNPL infrastructure and signed up thousands of merchants, which is not easy. So I’m not too worried about new competitors because there are high barriers to entry. It is not as if a new entrant can just come into the market and say “I’m doing BNPL now”. It can take years for them to build up that infrastructure, and onboard and train merchants.
Tell us about the biggest challenges of running a BNPL business.
The hardest thing about this business is distribution. Merchants are selling on your behalf. So you have to be sure that all of your merchants are equipped to sell. But merchants often are not patient. They want simplicity. There are complexities in the BNPL process that you don’t have with cash – for example, the customer might not be qualified. But on the other hand, if we were to approve every customer, we could lose money.
So the biggest challenge is: how do I do my distribution, and onboard merchants, at scale? And that I believe is where the battle will be won or lost. That is, I think, the biggest headache for new entrants.
Any final words on the future of BNPL in Africa?
In Africa, BNPL isn’t a nice-to-have. It’s a virtual necessity. If you took out consumer credit from developed economies, they would collapse. But in most African countries, there isn’t really a sustainable credit infrastructure in the first place. So there’s this huge gap in the market where credit offerings are very nascent. BNPL offers us the opportunity to leapfrog other credit products, such as credit cards, and fill that gap so that customers can buy the things they need to be more productive.