BNPL- A Fast Track to Financial Inclusion in Africa

Financial inclusion in Africa has always been the hot topic with banks and development institutions alike but unfortunately, very little progress has been made on this for over two decades since I have watched this space except in smaller pockets in Kenya and maybe Rwanda.

Africa was never a brick and mortar branch story with its massive costs of real estate, construction, cash management, networks, people, generators, etc. ATM downtimes have always been a huge challenge on the continent due to various infrastructure issues.

The first decade of this century saw the big daddies of African banking loaded with commodity dollars go on a frenzy to expand into brick and mortar distribution which was not to make money from day one. A new country license would be obtained; a new branch would be opened customers would be acquired to open accounts but the lack of service and value add, aided by high service charges would make these accounts dormant and branch unviable with the focus shifting on a few big corporates leaving the core retail customer unbanked or underbanked and accounts falling dormant.

Any successful retail banking model has to be based on managing the customer lifecycle and creating a customer value proposition to create stickiness through credit and other cross-sell which has been missing in Africa due to lack of credit data and skepticism on part of larger institutions to get into consumer lending, unlike the leap Citibank took in 90's in India and other similar emerging markets.

Digital banking and AI tools have been a boon for Africa as alternative data sources can provide rich and credible insights into customer behaviour enabling financial service providers to build powerful lending models.

BNPL with its mix of credit and e-commerce features is the perfect combination for a financial inclusion revolution in the youngest and most under-banked continent. BNPL with its small-ticket e-commerce offering helps build a two-way trust between a customer and provider where the customer can receive and touch the product and pay in small amounts over the next few cycles.

Africa will overshoot the credit card era as BNPL is something that will always appeal to the interest wary youth and BNPL is always touted as a perfect antithesis to high-interest rate credit cards. BNPL makes it easier to offer loans to those who are outside the traditional financial ecosystem and - that's what Africa is and that's what Africa needs.

The current pandemic has accelerated the emerging markets e-commerce penetration which is supposed to grow exponentially and as the demand grows many seek alternative payment methods and loans to make purchases especially the unbanked living in these markets.

BNPL has huge potential to introduce a younger generation to alternative financing in these markets while providing a valuable service to markets with low credit card penetration and limited access to formal financial services among all age brackets. As many retailers move online for the first time across markets in Africa, brand loyalty and fuelled digital transformation can translate into more inclusive financial onboarding

Due to the absence of credit data and almost nonexistent credit card penetration across markets in Africa, BNPL providers have a massive competitive advantage with the technology to gather alternative data and assess creditworthiness but they have faced challenges concerning capital requirements and building credible infrastructure.

Nevertheless, there is technology available to build robust models in countries like India, Indonesia, Mexico, and Brazil which have successfully built substantial loan book sizes at low delinquency levels and are very profitable with low burn capital. This is the niche we at Finnafrica/Brazza transactions bring to African markets with our tested technology and rich emerging market delivery expertise.

Regulators in Africa need to be aware and beware and ensure that consumer protection and education are essential to building trust which in any case remains an area of concern and one of the biggest hurdles to financial inclusion in the continent. Hence, integrating consumer education principles into the BNPL model can help with financial literacy. There are very good examples like Plentina a fintech startup in the Philippines which uses a gamification model on the introductory screen of their BNPL module to educate customers. This kind of responsible lending approach is essential in African markets.

Traditionally, BNPL kind of offering was available on big-ticket items like televisions, other high-end electronics and household items - including two-wheelers, financing which is a massive opportunity by itself in Africa and other emerging markets. These models can be very powerfully used to test customer credit in thin file markets and gather very valuable data to build credit scores and subsequently cross-sell multiple products to the customers through their life cycle. Pletina in the Philippines has been able to generate 10 million credit scores which is very valuable to offer a whole range of lending and credit products to customers.

With increased digitisation and smartphone penetration across their target markets, customers are hungry for solutions that enable online purchasing through no-interest alternative financing options. BNPL providers are well-positioned in this space, as they have access to the technology and data to onboard and facilitate customers without formal financial services access. Instead of battling for market share in heavily competitive developed markets, these companies that can provide BNPL to the middle 20% - 30% of the population and find themselves as market leaders – attracting retail partnerships, investor interest, and funds, as well as speedy consumer uptake.

As more players jump on the BNPL bandwagon, the space will continue to become increasingly crowded in developed markets. The pandemic has fast-tracked digital financing and as demand increases, consumers are likely to continue to use digital payment methods as long as they are available, convenient, and affordable – in both developed and emerging markets. Companies that can take advantage of the opportunity to capture underserved segments in emerging markets across Africa will be best positioned to outpace the international competition.

Emerging markets represent a massive chunk of this opportunity, but not without challenges. Tailored market-specific approaches to financial education and credit scoring require investment and patience, but both are necessary to ensure BNPL offerings are marketed and introduced responsibly. If this can be achieved, those investing in emerging markets can capture a rapidly growing market with the potential to graduate beyond retail purchases to more advanced financial services and deeper financial inclusion.