Can the ‘buy now, pay later’ model unlock the potential of e-commerce in emerging markets? | Atalaya

Building on the e-commerce dynamics of the COVID-19 pandemic, the “buy now, pay later” (BNPL) is one of the fastest growing segments of consumer credit, especially in emerging markets.

BNPL providers offer point-of-sale loans that consumers can repay in installments over weeks or months. By charging little or no interest, these microloan providers profit from the transaction fees paid by the retailer, in turn offering increased sales and customer conversion.

In June 2022, the American multinational Apple has announced that it will launch its own deferred payment service, thus entering a market dominated by start-ups such as the Swedish Klarna and the American Affirm. In the same month, PayPal announced its BNPL service, Pay Monthly.

Last year, BNPL accounted for $ 2 out of every $ 100 spent on e-commerce, according to Global Data. With a global market value of $ 125 billion in 2021, the segment is expected to grow at a compound annual growth rate of 24.9% and reach $ 3.9 trillion in 2030.

If inflation and reduced consumption influenced company valuations after the pandemicthe adoption of favorable regulatory frameworks and the growth potential of BNPL in emerging markets should help it overcome economic obstacles.

Increase financial inclusion

BNPL allows retailers to access markets where finance is less available and the purchasing power of individuals and micro, small and medium-sized enterprises (SMEs) increases.

Because BNPL automates the credit approval process, integrating it with the online payment flow, checks are completed in seconds and without face-to-face interactions. It is attractive to young and digitally savvy populations in emerging markets where credit penetration is limited.

BNPL is especially interesting for people who don’t have a solid credit history, and the service often funds a user’s first online purchase.. For customers, it reduces credit-related debt risk by limiting the risk of non-payment or fraud through flexible credit checks and underwriting.

Most of BNPL’s growth has been in the business-to-consumer space, financing online purchases of goods that people could not otherwise afford. Many start-ups, such as valU in Egypt, They also offer point-of-sale loans for services such as health care, education, and travel, as well as conventional goods.

However, some start-ups specifically target the business-to-business space by offering a credit line to MSMEs to purchase from suppliersgiving them greater purchasing power and better access to credit.

Trends in emerging markets

In emerging markets, the percentage of adults making or receiving digital payments increased from 35% in 2014 to 57% in 2021according to the World Bank.

Latin America became one of the fastest growing e-commerce markets in the world during the pandemicwith retail e-commerce expanding 37% in 2020, and is particularly attractive to BNPL.

Installment payments are an integral part of the financial culture of many countries, as are alternatives to cash; in Brazil, consumers prefer bank receipts, known as bank bills, to cash, while in Mexico, neighborhood stores, such as OXXO, offer a voucher system for payments.

In April 2021, Nelo, a fintech agency founded by former Uber executives, raised $ 3 million in an initial funding round to begin offering BNPL services in Mexico. A recent partnership with Mastercard will allow Nelo’s services to automatically cover all e-commerce, eliminating the need to enter into agreements with specific suppliers.

Among other important players looking to develop BNPL services in a region where 86% of payments are made in cash, we can mention the Colombian company Addiwhich has established itself in Brazil and is aimed at the Mexican market, as well as the American start-up Alchemy.

Several markets in the Asia-Pacific region will experience a BNPL boom, digital loan balances are expected to reach $ 116 billion by 2025, according to a 2021 report from Google.

GoTo, the largest Indonesian startup, recently announced plans to offer BNPL loans alongside pre-existing services ranging from transportation to online shopping. Kredivo, Indonesia’s largest and fastest growing BNPL player, plans to expand to Vietnam, where the BNPL market is expected to outpace $ 1 billion by 2028, compared to $ 496 million in 2022.

BNPL’s activities in the Middle East and North Africa also attracted significant investmentsalthough BNPL’s valuations have declined from a year ago as the market matured.

In August 2022, Tamara, based in Saudi Arabia, raised $ 100 million in the Series B round led by Sanabil Investments. As a participant in the sandbox program of the Central Bank of Saudi Arabia, the company is aiming for regional expansion. Tabby, based in the UAE, also raised $ 150 million in a mega-debt financing round in August 2022.

In sub-Saharan Africa, several local players are looking to expand BNPL options in liquidity-based economies.

In January 2022, Kenyan company LipaLater raised $ 12 million in a debt and equity round, and in March 2022 Nigerian firm CredPal raised $ 15 million in a similar expansion. In the region, BNPL is mainly used to finance expensive purchases such as laptops, electronics and automobiles, although peer-to-peer lending opportunities are emerging.

Challenges and regulations

As the segment grows, BNPL providers face increased competition and higher interest rates, which can reduce profit margins. Klarna, once Europe’s most valuable fintech company, has closed its latest funding round with an 85% lower rating..

Slowing spending due to inflation and supply chain concerns is driving many companies to weigh growth versus profitability and the segment is expected to undergo further consolidation and portfolio extensions.

Nevertheless, international fintech players have begun to enter a space once reserved for start-upsboth through partnerships with existing BNPL suppliers and by developing its own services.

LRegulation will also play a supporting role, as BNPL services generally do not fall under existing consumer credit laws.. In Malaysia, the central bank, the Malaysian Securities Commission and the Ministry of Finance are working on a consumer credit law this year, which includes BNPL.

Other markets, such as Australia and Singapore, opt for a voluntary code of conduct, which reconciles consumer protection and support for continued growth. Potential regulations may include age and credit limits for BNPL loans, fair marketing and disclosure requirements, measures to discourage late payments and limit debt accumulation and debt sharing, credit information to enable better understanding of customer finances.

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