THE RISE OF BUY NOW, PAY LATER /BNPL/: TRANSFORMING CONSUMER FINANCING
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Digital Marketing Manager @ Bank of Abyssinia | MA in Marketing Management
By Hawi Dadhi &
Alemayehu Simeneh
The financial landscape has witnessed a significant shift with the advent of Buy Now, Pay Later (BNPL) solutions in recent years. BNPL solutions offer the flexibility and convenience that traditional credit systems often lack by providing quick loans to consumers for online and traditional store shopping.
BNPL has rapidly become a significant disruptor in the payments and e-commerce space, particularly post-pandemic, as consumers sought flexible and transparent alternatives to traditional credit. The model allows for deferred or installment payments, which gained popularity as financial uncertainty and online shopping surged. BNPL not only empowered consumers by increasing purchasing power but also boosted e-commerce growth through higher conversion rates and transaction values. Its rise indicates the existence of a strong market demand for more flexible, seamless payment solutions.
This article delves into the rise of BNPL, its benefits, criticisms against it, and BNPL products in Ethiopia.
HISTORY OF BNPL: A TIMELINE
In a traditional sense, the concept of BNPL dates back to, the history of trading.
The concept of buying now and paying later has evolved over centuries, adapting to consumer needs and technological advancements. Below is a timeline highlighting the key developments:
19th Century: Installment plans emerged, allowing consumers to pay for goods over time, primarily for expensive items like furniture and machinery.
1900s: Retailers began offering store-specific credit cards and financing options to boost sales.
https://core.ac.uk/download/pdf/14057644.pdf 1920s: Layaway programs became popular during the Great Depression, enabling customers to reserve items and pay in installments before taking them home.
1950s: The introduction of bank credit cards revolutionized consumer credit, offering a new level of purchasing flexibility.
2010s: The digital era saw the rise of modern BNPL services integrated into online shopping platforms, with companies like Affirm (2012) and Afterpay (2014) leading the way.
2020s: The COVID-19 pandemic accelerated BNPL adoption as consumers sought flexible payment options during economic uncertainty.
THE ORIGINAL PURPOSE OF BNPL
The original goal of Buy Now, Pay Later services was to benefit both consumers and merchants by allowing immediate access to goods without upfront costs. This improved customer satisfaction boosted sales, and increased average transaction values. It also provided a simple, often interest-free payment option that attracted consumers cautious of traditional credit cards, promoting responsible spending.
By addressing the needs and challenges of both sides of the transaction, BNPL has established itself as a significant component of modern commerce, influencing purchasing behaviors and shaping the future of consumer financing both online and in stores.
WELL-ESTABLISHED BRANDS IN DIFFERENT REGIONS
The first modern BNPL services emerged in the early 2000s.
Klarna, Affirm, and Afterpay are pioneers in the BNPL space.
Different BNPL products have been successful in various regions due to their tailored approaches to meet local consumer needs, strategic partnerships with merchants, and emphasis on user experience.
Africa: Lipa Later and Payflex address the unique financial landscapes of East Africa and South Africa, focusing on financial inclusion and accessibility. Lipa later, a company based in Kenya operates in Nigeria, Rwanda, and Uganda. The telecom giant Safaricom also offers BNPL services.
Europe: Established in 2005, in Sweden, Klarna stands out with its diverse payment options and extensive merchant network, while Clearpay leverages Afterpay’s global expertise to cater to the UK market, especially among younger shoppers. Klarna is one of the world's leading BNPL providers, with over 150 million users and partnerships with 450,000 merchants globally.
USA: Affirm, established in 2012, is one of the largest BNPL service providers boasting over 18 million user. It offers flexible financing with transparent terms and no late fees. PayPal Pay in 4 utilizes PayPal's widespread acceptance to provide convenient BNPL options.
Each of these providers has contributed to the growing popularity of BNPL services by addressing specific market needs and leveraging technology for seamless integration. , and promoting responsible spending habits among consumers.
TYPES OF BNPL SOLUTIONS
BNPL solutions come in various forms, each catering to different purchasing scenarios and consumer preferences.
In terms of service providers, own brands, payment networks, specific fintechs, and financial institutions are engaged in providing BNPL services. In terms of transaction value, some offer small short-term loans while others provider big-ticket longer-term loans. Under the Pay in 4 model, payment is made in 4 installments, usually at 2-week intervals and with no interest fee.
BENEFITS OF BNPL SOLUTIONS
FOR CONSUMERS
1. Financial Flexibility
The Buy Now, Pay Later (BNPL) model offers consumers financial flexibility by allowing them to divide the total cost of a purchase into smaller, manageable payments over time. 2. Interest-Free Payments
A significant advantage of BNPL services is the offer of interest-free payment periods. Unlike traditional credit cards that may charge high-interest rates on carried balances, many BNPL services provide these installment plans with little to no interest. This means consumers can acquire necessary or desired items without the immediate financial strain of paying the full price upfront.
For instance, providers like Afterpay and Klarna often allow consumers to split payments over several weeks or months without adding interest charges, as long as payments are made on time. This feature makes BNPL an attractive alternative to traditional loans or credit cards, where interest can accumulate quickly and increase the overall cost of purchases. It enables consumers to save money in the long run and avoid the debt traps associated with high-interest borrowing.
2. Simplified Approval Process
BNPL services typically have a streamlined approval process that is faster and less stringent than traditional credit applications. Many providers perform only soft credit checks or assess eligibility based on factors like purchase history and repayment behavior with the BNPL platform. This minimal barrier to entry makes BNPL accessible to a wider audience, including individuals with limited credit history or those who may not qualify for traditional credit cards. As a result, more consumers can enjoy the benefits of deferred payments without the hurdles of conventional lending.
3. Enhanced purchasing power & Shopping Experience
The ability to receive products immediately while deferring full payment enhances the overall shopping experience. Consumers experience increased satisfaction from instant gratification without financial stress. This convenience can lead to greater customer loyalty, as shoppers are more likely to return to retailers that offer flexible payment options. Additionally, BNPL services often integrate seamlessly into the online shopping process, providing a smooth and user-friendly checkout experience that encourages repeat business.
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4. Financial Inclusion
Buy Now, Pay Later (BNPL) services are transforming the credit landscape by expanding access to financing for individuals traditionally underserved by conventional lenders. With flexible payment options and minimal credit requirements, BNPL is particularly inclusive of people with limited or no credit history, such as young adults, immigrants, and those in the gig economy.
Additionally, BNPL services present an opportunity for consumers to build or improve their credit history, with some providers reporting payment behavior to credit bureaus. By fostering responsible payment habits, BNPL can enhance credit scores, which in turn increases access to other financial products.
FOR RETAILERS AND BUSINESSES
1. Increased Sales
Integrating BNPL options can significantly boost a retailer's sales performance. By lowering the financial barrier to purchase, consumers are more likely to complete transactions they might otherwise abandon. According to a study by Afterpay, retailers offering BNPL solutions experienced a 20-30% increase in conversion rates. Furthermore, customers tend to spend more per transaction when given the option to pay over time, leading to higher average order values. This uplift in sales volume directly impacts a company's bottom line and revenue growth.
2. Attracting New Customers
BNPL services are particularly appealing to younger demographics, such as Millennials and Gen Z, who often prefer alternative financing methods over traditional credit cards. These groups value convenience, transparency, and flexibility—all hallmarks of BNPL solutions. By offering BNPL, retailers can attract this tech-savvy audience, expanding their customer base. This not only drives immediate sales but also fosters long-term relationships with a demographic that will continue to have significant purchasing power in the future.
3. Reduced Cart Abandonment
One of the persistent challenges in e-commerce is the high rate of shopping cart abandonment, often due to unexpected costs or the total price exceeding a customer's immediate budget. Offering BNPL at checkout provides a solution by breaking down the total cost into smaller, more palatable payments. This flexibility can alleviate sticker shock and encourage customers to proceed with their purchase. Retailers implementing BNPL options have seen a reduction in cart abandonment rates, leading to increased sales completion.
4. Competitive Advantage
In a crowded marketplace, providing BNPL options can give businesses a competitive edge. Consumers are increasingly seeking retailers that offer flexible payment methods, and businesses that meet this demand can differentiate themselves from competitors.
CRITICISMS AGAINST BNPL
Although BNPL offers various benefits, it is not without harm. There is a concern that BNPL products increase impulse buying, making consumers purchase products they would not otherwise buy. Other criticisms are directed towards the business model employed. These include:
Overindebtedness:
Because BNPL products don’t typically rely on credit history, customers can take loans from multiple sources and increase their debt load. Absence of late payment penalties further contributes to overindebtedness as borrowers face fewer consequences for not paying in time, compared to traditional lending models.
Delinquency and default:
BNPL products that fail to properly assess the consumer’s ability to repay increase delinquency.
Hidden fees:
Absence of transparency on the total cost of credit can make late payment penalties and other fees associated with BNPL hidden. The burden of hidden fees often disproportionately falls on young users who are less experienced with the credit system. Regulations on standardized disclosure are needed to tackle this drawback.
Difficulties with disputes:
Dispute resolution difficulties arise when a consumer returns a product purchased on credit. Borrowers may be required to continue paying for the product per the BNPL installment plan until retailers and BNPL providers communicate the information.
BNPL IN ETHIOPIA
The concept of Buy Now, Pay Later (BNPL) resembles the traditional practice of “Dube,” commonly found in small shops, where customers purchase items on credit. In this system, shop owners rely on intuitive judgment and social capital to determine which customers are eligible for such credit. These shop owners frequently maintain manual records of credit transactions, known as "Dube Debter."
The Buy Now, Pay Later (BNPL) sector is in its early stages in Ethiopia, but it holds significant potential for growth. The recent wide adoption of mobile money platforms and other innovative payment solutions have revolutionized digital payments and could further facilitate the adoption of BNPL services. As e-commerce begins to gain traction, integrating BNPL options can provide consumers with flexible payment methods, stimulate online retail growth, and support the broader economy by increasing purchasing power.
DubeAle, the first BNPL app in Ethiopia, was launched in January 2023 by Dashen Bank. The product requires users to present their salary or property information to bank branches to get spending limits. Interest fees are charged for late payments and an interest-free scheme was integrated as a sharia-compliant version this year.
Apollo, a digital bank platform by the Bank of Abyssinia, offered a BNPL solution called Asbeza Loan on April 2023, which is also integrated with the digital platform SeregelaGebeya.com, aimed at selling and distributing fast-moving consumer goods (FMCG). Through its availability on SeregelaGebeya.com and app platforms, Apollo's Digital Asbeza loan can be considered a Buy Now, Pay Later (BNPL) solution, providing convenient access to essential goods while allowing flexible payment options.
Other device financing options also provide services that resemble BNPL. For instance,
Alegnta, a digital lending app launched in 2023 by Lion International Bank, features loan for furniture and device purchases.
Apollo, a digital banking application by the Bank of Abyssinia, has also recently introduced a device financing loan for Samsung smartphones. It charges a monthly interest of 3.5%.
As Buy Now, Pay Later (BNPL) continues to reshape the consumer finance landscape, its influence on spending behavior and retail strategies is undeniable. By offering flexible payment solutions, BNPL has empowered consumers to make larger purchases and manage their finances more efficiently, while providing retailers with a powerful tool to boost customer acquisition and loyalty. However, as the market expands, both consumers and businesses must remain mindful of the potential risks associated with overspending and financial mismanagement. Looking ahead, BNPL is poised to become an even more integral part of the global financial ecosystem, driving innovation and enhancing consumer experiences across industries. Now is the time for businesses to embrace this trend and adapt to the evolving needs of their customers.
KEY STATISTICS AND REFERENCES
Market Growth: The BNPL market is expected to grow from $7.3 billion in 2019 to $33.6 billion by 2027, according to Global Market Insights.
Consumer Adoption: A report by Ascent found that 37% of U.S. consumers have used a BNPL service.
Demographic Appeal: Millennials and Gen Z account for the majority of BNPL users, with 61% under the age of 45 (Ascent).