Is the buy-now-pay-later model a win for consumers or a potential debt trap?

Windalyn Goma, 31, has been using buy-now-pay-later platforms in the UAE to purchase home appliances and pet food since last year. What the Filipina public relations executive in Dubai likes about the BNPL model is that it allows her to make small purchases and spread them across two to four interest-free payments. “I am trying to stop myself from using credit cards now, so I either use cash or BNPL for all my purchases,” she says. “I have started cancelling some of my credit cards because their spending limits are very high, which tempts me to overspend. BNPL gives you a better sense of control over your finances.” BNPL is a type of interest-free, short-term loan that allows consumers to make purchases upfront, receive the goods or services immediately and pay for them at a later date in monthly instalments. For example, if you buy something in a store or online, you may be offered the buy now, pay later option at checkout. If you are approved, you usually make a small down payment at the checkout. You will then be expected to pay off the remaining balance in a series of interest-free instalments. The coronavirus pandemic resulted in a shift in consumer spending habits and accelerated the growth of online shopping. Global e-commerce transactions totalled $4.6 trillion last year, up 19 per cent from 2019, a report from Worldpay says. BNPL accounted for 2.1 per cent or about $97 billion of that sum. This figure is expected to double to 4.2 per cent by 2024, says Worldpay. More than 10 per cent of online shoppers in the UAE used the BNPL model in 2020 and this is expected to reach 30 per cent by 2026, representing more than $2bn in consumer credit, data provided by Dubai-based management consultancy RedSeer shows. BNPL providers are responsible for reminding customers of their payment due dates, Ms Goma says. “However, they do not mention the consumer’s spending limit at the outset like credit card providers do. I found out while making a transaction that my BNPL spending limit was Dh3,000. I could not make another purchase without making the full payment on my previous loan,” she adds. There are a number of BNPL players vying for a share of the Middle East market, including Spotii, Postpay, Cashew , Tabby and Tamara . Australia’s Zip, a global BNPL platform, bought Spotii for $16.25 million in May this year. “There’s a general growing trend among younger consumers of [an] aversion to credit cards,” Hosam Arab, chief executive and co-founder at Tabby , says. “People are tired of high interest cards and recurring fees preventing them from living with financial freedom. We see our core users aged between 25 and 45 with diverse demographics.” Tabby’s BNPL solutions are available for both online and offline retailers to create omnichannel shopping experiences. “Given the digital nature of the business, implementation on e-commerce purchasing platforms is a plug-and-play model. Hence, the traction on e-commerce is faster and a greater number of e-tailers are providing consumers with an option to choose from a BNPL solution,” according to Sandeep Ganediwalla, managing partner in the Middle East and North Africa for RedSeer. “However, BNPL as a point-of-sale financing tool is also being offered in physical stores, but the majority of BNPL demand globally comes from online channels,” he adds. While average basket sizes tend to be higher when Tabby is used, “we’ve seen purchases vary from a Dh6,000 couch to a Dh60 lipstick and everything in between”, says Mr Arab. The BNPL provider has no set limit for how much a customer can spend when they use the platform. “We take responsible spending very seriously and run real-time approvals for every purchase based on payment history, basket sizes and other factors,” Mr Arab says, adding that Tabby’s default rates are minimal. Tabby customers receive regular reminders before any due payments to avoid missing them. If Tabby is unable to collect payments on the scheduled day, the customer cannot make further purchases using the platform until dues are paid, the chief executive says. “We charge a late fee of Dh15 per day after a payment is due. If you have not repaid for another two weeks, an additional late fee of Dh30 is applied. No more fees are charged. This structure works a lot better for consumers versus credit cards that trap you in debt with rolling interest,” he says. Rival provider Spotii also offers its services both online and offline, including with large offline merchants such as Jashanmal and Jumbo. While online continues to be a growing segment of retail spend, offline remains a relevant shopping channel for consumers in the region and “therefore it is essential for us to be where customers are”, says Anuscha Iqbal, chief executive of Spotii . “The BNPL model is better suited for smaller everyday ticket items versus very large purchases. The model works best for lower order, higher volume transactions,” she says. The payment model is easier for the younger generation to adopt because they are digitally savvier and more averse to traditional credit, hence you will see BNPL pick up among millennials and Gen Z, Ms Iqbal adds. “Payment defaults are relatively low under BNPL-based solutions in the region,” says Mr Ganediwalla from RedSeer. “The primary reason is that the ticket prices are significantly lower [Dh200 to Dh300] than credit card or loan instalments and over a relatively short term. Another mechanism for prevention of defaults is the soft credit checks performed by BNPL service providers,” he adds. Contrary to perceptions, BNPL companies conduct credit checks, Mr Ganediwalla says. Any missed payment by consumers could potentially be reported and subsequently impact their credit rating, he warns. “Even if that may not be an imminent risk, BNPL service providers can use aggressive debt collection agencies if defaults increase,” he adds. According to RedSeer research, about 50 per cent of consumers in the UAE who use BNPL financing do so to avoid credit card charges. BNPL also enables consumers to manage their cash flow better or to purchase a product they cannot afford at the time, Mr Ganediwalla says. However, common criticism about the BNPL model is that it encourages people to spend more than they can afford and incur additional debts. About 55 per cent of 1,500 consumers polled in the US said they tend to spend more ($312 average spend) when using BNPL than other payment methods, according to a survey in April by the Strawhecker Group. Don’t be fooled into thinking that this is anything other than a different style of credit card, says Nathan McFarlane, founder of AskHelpWith.com. “Watch out for extra charges in the fine print. These models contain many different charges, including late payment fees and additional charges in the event you have to reschedule payments,” he warns. Consumers should read the terms and conditions in detail, says Carol Glynn, founder of Conscious Finance Coaching. Ask yourself if there any hidden fees, administration fees, interest rates and what are the penalties for defaulting, she adds. “Defaulting and not repaying the amounts due will induce financial penalties and fines and affect your credit score ,” Ms Glynn warns. There is no add-on benefits to BNPL such as points accumulation, cashback options or consumer protection insurance that credit cards often offer. “It’s important to think ahead when signing up for this kind of agreement. If you do not have the money to pay for the item now, where will you source the money to pay the instalments?” Ms Glynn says. “Do not think of it as an easy or casual loan. It carries the same obligations as any other loan and must be paid back in line with the credit provider’s terms. It may feel more relaxed but it carries late payment penalties and fines if instalments are not paid.” As the BNPL market is largely targeted at youth, “the combination of a young user with a lack of understanding of what they are getting into can be a recipe for trouble”, according to Mr McFarlane. “This and the lack of BNPL being linked to centralised credit rating systems could mean the user could spiral into multiple BNPL accounts. This cycle is often driven by younger people making impulse online purchases and then compounding their problems over time.” Vendors also need to conduct some level of due diligence and checks to ensure the customer has the ability to repay the instalments when they are due, Ms Glynn says. Companies must have a backup plan such as credit card details they can charge should a customer default. “Returns can be an issue, too. If you return an item, it can take substantial time and effort to have the BNPL credit provider acknowledge the return. This means you may be obliged to continue to pay for an item you no longer have until the issue is resolved,” she adds. Meanwhile, unchecked spending may offset the consumers’ budgeting and cash flow and cause potential financial stress, Mr Ganediwalla says.

Is the buy-now-pay-later model a win for consumers or a potential debt trap?

BNPL providers say they give users more control over their finances while critics argue it could encourage overspending