Rise in Debit Transactions and the ‘once in a lifetime opportunity’ for BNPL player in the UAE.

Rise in Debit Transactions and the ‘once in a lifetime opportunity’ for BNPL player in the UAE.

Apologies for the dramatic title of this blurb but its Saturday afternoon and I just finished watching Rambo: Last Blood. Some of the drama is spilling over…..

In the UAE, over the last 6 months, we are seeing an interesting trend – Debit card transactions displacing credit card transactions. Number of reasons can be attributed to it:

• Cardholders don’t want to build up balances during a period when employed folks are facing job uncertainty and salary cuts; professionals have seen a decline in revenues, etc. Also, most of them don’t want to revolve their balances at extortionate rates which the card issuers charge (c40% per annum in the UAE)
• Its proving hard to get a credit card from banks as credit policies have tightened; existing card-holders limits have been reduced, etc.
• The global aversion to credit cards among Millennials and Gen Zs is gaining traction in this part of the world (this is a hard one for me to validate but I am fairly certain that this trend has also trickled into the UAE)

While all the above has aided in growth of debit card transactions, the need and love for credit hasn’t disappeared – its just become harder to get and more expensive to afford if you continue using your credit cards.

Here enter the various BNPL players like ‘Knights in a Shinning Armor’ with their compelling consumer proposition:

• ability to take short term credit (pay in c4 instalments) or pay later (after 15 or 30 days),
• easy onboarding process,
• growing network of merchants offering the BNPL payment option and,
• most importantly an interest free (0%) offer (Note: please do check the late payment fees).

BNPL players in the UAE should not under-estimate the importance of the above trend and the opportunity it has created for them, as they try to gain traction in a marketplace which has been dominated by credit card issuers. While I can’t predict how long this window of opportunity will last but for the foreseeable future, I don’t see banks easing their credit terms, nor lowering their APRs. During this period BNPL players need an ‘all hands on deck’ approach to woe the merchants and achieve the coverage and most importantly work together (co-opetition) to support their sector (and not undermine each-other and in doing so, delay the decision making process among the merchants).

What I am suggesting might prove to be an expensive strategy for a period (try and avoid price wars please), but the returns on investment could be bountiful in the longer term. If the BNPL players aren’t able to seize the moment and once ‘normal-service’ resumes for the credit card issuers, it will become harder and more expensive - to convince the retailers to ‘shell’ out the relatively high fees which BNPL player intend to charge (c2x of Credit Card transaction) and compete with the banks who have deep pockets to both incentivize their consumers not to switch, and leverage their payment acquiring business to reduce acceptance cost for merchants. Some banks will also launch instalments on debit card transactions – like what we see in countries like India. In this scenario the cost of merchant and customer acquisition might prove to be prohibitive and potentially unsustainable (at least for BNPL players who want to offer the line of credit to consumers as a part of their business model). I am not suggesting that it will be impossible to compete and prevail (but it will definitely be more expensive) 

The silver lining for these BNPL players (who provide the line of credit to the customers) could be a reduction in the Debit Card Interchange Rate (which is something which I believe is on the cards soon; thanks to the Central Bank of UAE). This will reduce the cost of collection from customers (as majority of the customers using these BNPL solutions are opting to use Debit Cards as their repayment mechanism), part of the reduction can be passed back to the merchant which would fuel wider adoption and greater sponsorship for the product.

Irrespective of whether all the stars align or not (the reduction in interchange rates, etc), the current pandemic and the impact it’s had on consumers behavior towards credit cards, provides BNPL players with a great opportunity to scale rapidly and seize the moment.       

As I said it might be a once in a lifetime opportunity ??