Fads and trends come and go in African – and global – tech, but the steady rise of “buy now, pay later” (BNPL) on the continent looks set to continue for some time to come.
When Disrupt Africa released the first edition of its Finnovating for Africa report back in 2017, BNPL – a type of short-term financing that allows consumers to make purchases and pay for them at a future date – barely registered, but by the time the fourth edition comes out next year, a sizeable percentage of fintech companies on the continent will be operating such services.
These startups are also unusually well-funded, even for African fintech ventures, with the likes of Nigeria’s CredPal, Kenya’s LipaLater and Egypt’s Sympl among those to have banked capital in the last few months alone.
But why the sudden explosion in interest in BNPL, both on the entrepreneur and investor sides?
Democratisation of credit
Eric Muli is CEO of Kenya-based BNPL company LipaLater, which began operations in Kenya in 2018 and has since ventured into Rwanda, Uganda and Nigeria. The startup has served 250,000 customers to date, and has 6,000 merchants onboarded. Muli said for too long access to credit in Africa had been the privilege of a “lucky few”.
“Statistics show that only five per cent of Africans have access to formal credit services. At the same time, over one billion Africans have extremely low purchasing power, limiting their ability to pay for goods and services upfront. It is simply an idea whose time has come. BNPL companies help bridge this gap by availing affordable credit to consumers in Africa, the majority of whom wouldn’t qualify for credit from banks,” he said.
Over in Nigeria, Fehintolu Olaogun is CEO of CredPal, which has launched an omnichannel merchant suite, Credal Pay, that helps merchants of any size conveniently offer buy now, pay later as a payment option to their customers. He said more entrepreneurs are being drawn into the space given its significant impact on African consumers in such a short time.
“Africa has the highest percentage of entrepreneurs, and a lot of these businesses are informal, which means they and their workforce earn daily, weekly, and monthly income. Earning at this capacity does not offer them the purchasing power they need to outrightly make purchases for medium-high ticket items. With the opportunity that BNPL offers, many of these people can now enjoy a better standard of living, and financial ease because they can purchase essential goods while spreading the payment,” he said.
“With technology, there are more opportunities to build innovative digital products that can properly provide BNPL services to consumers in our climate. There have also been more investments in African startups which have made it easier to build, innovate and serve African consumers while contributing to the growth of the economy.”
For Mohamed El-Feky, co-founder and CEO of Egypt’s Sympl, macro-economic conditions have also assisted the growth of the space.
“Financial solutions are most needed in times of recession, so we see the sudden traction as a consequence of high inflation rates and their impact on increasing prices of end user products,” he said.
Consumers, then, stand to gain from the proliferation of BNPL services, with many Africans able to access short-term credit for the first time. Startups offering these services, meanwhile, are smelling a real opportunity.
“For companies running BNPL services, the benefits start with the profit from interest rates and charging merchant fees while ultimately providing opportunities to consumers as they tackle inflation and low purchasing power,” Olaogun said.
“It’s a known fact that inflation affects spending, which discourages consumers from taking cash loans, but BNPL is a more promising offer because what we’re offering is a chance to purchase necessities and get immediate and long-term value while they conveniently pay back.”
Muli said African BNPL companies were innovating new ways to impact how businesses do things while addressing consumers’ pain points.
“We are seeing BNPL companies provide credit services in underlooked sectors such as access to medical services, education, travel, energy solutions, and various lifestyle products, while improving the standards of living for millions of Africans,” he said.
“In addition, their retail partners increase their customer reach, sales volumes and revenue by a significant 30 per cent or more, impacting millions of Africans’ livelihood through job creation and the ripple economic effect. BNPL services are largely untapped in most countries, hence the economic opportunity here is massive for businesses venturing into this space.”
El-Feky agrees that merchants stand to gain in a very real way.
“The benefits for business are surely in growing a clientele base at a lesser cost and lower burn rate, while the opportunity lies in expanding their network of partners and merchants and showing the real impact of having a BNPL solution available for end users to use at merchants and meet their every day financial needs,” he said.
A complex web
It is not as simple as “build it and they will come” in the BNPL world, however. Olaogun says there are major challenges around distribution, which involves merchants selling on your behalf.
“There are complexities in the BNPL process that don’t happen with cash – for example, the customer might not be qualified to assess credit, for purchase so making merchants understand that it’s impossible to offer every customer credit due to certain conditions that need to be fulfilled. So, you’re thinking about how to onboard merchants and educate them about credit at scale while ensuring that they uptake and upsell the service to customers,” he said.
Another challenge is the lack of sufficient documentation and unstructured credit records of consumers, which in other parts of the world would guide how BNPL platforms make risk-based lending decisions.
“Lastly, there’s credit education. Both credit culture and BNPL in Africa are still very much at their developing stage. Yes, a lot of consumers are familiar with loans, and yet with that, the understanding to use credit responsibly and pay back timely is still a major challenge that lenders in Africa are tackling,” said Olaogun.
Muli said Africa has been a cash economy for a long time, and agrees that consumers have limited education and understanding of credit services.
“BNPL companies have to sensitise people about the ability to use credit services to achieve the lifestyle of their dreams and demystify misconceptions around credit. In parallel, BNPL companies are helping to build the credit history of consumers in Africa and the infrastructure for credit scoring,” he said.
Insatiable investor appetite
In spite of these challenges, African BNPL startups are hot property with investors right now. Olaogun says part of the appeal is the sheer necessity of these solutions.
“Consumer credit products like credit cards, mortgages, and car financing are still not popular amongst African consumers, which make BNPL a necessity, not just to increase consumer purchasing power but also to drive Africa’s economy,” he said.
“There’s also the projected growth for e-commerce in Africa which is proof of the ease of deploying BNPL as a digital payment option. Africa is an untapped market and investors are taking a cue from how consumer credit has performed in developed economies.”
El-Feky agrees investors are tempted to invest in African BNPL platforms based on what they have seen elsewhere in the world.
“There have been global players in the market for quite some time now, which gives investors clear benchmarks and key performance indicators to look for in any new company offering similar solutions,” he said.
For Muli, it comes down to investors being keen to invest in innovative solutions that improve people’s lives or the ease of doing business, especially in emerging markets like Africa.
“As a credit provider and payment option, BNPL services such as Lipa Later are an innovation in financial services that impact and enable the purchase and payment landscape. It’s no wonder that we’ve seen investments go into BNPL companies in Africa,” he said.