How buy now, pay later schemes have influenced consumer spending

Shoppers must remain mindful as ease of access to credit can lead to increased impulse buying

While Generation Z and millennials were the early adopters of buy now, pay later services, the user base has now widened. Getty Images

Ashitha Jayaprakash mainly uses buy now, pay later companies to break down purchases that are between Dh300 and Dh400 (about $82-$109).

The 29-year-old content marketer says she has been using BNPL services since 2022 to make smaller payments per month with zero interest.

“The payment is spread across three to four months and perhaps, more importantly, the BNPL apps are much more user-friendly,” she says.

“I feel like banking apps have very poor tech. The user interface of banking apps is not friendly at all, I have no visibility into my payments month-wise, or category wise [as in whether it’s an instalment or interest or a credit card purchase],” she adds.

In contrast, BNPL apps offer more transparency.

“I can see how much I owe in total, plus a breakdown of monthly payments and I don’t need to pay extra fees if I wish to pay the entire owed amount in one go. With bank instalments, they charge you a fee if you were to pay off an entire instalment amount,” she says.

The BNPL business model, which allows consumers to make online purchases instantly and spread their payments out over interest-free instalments, has boomed since the onset of the coronavirus pandemic, driven by millennials and Generation Z.

It has also emerged as a popular payment method amid high prices, rising interest rates and economic uncertainty.

Established BNPL players in the UAE include Mubadala-backed Tabby, as well as Postpay, Cashew, Spotii and Tamara.

The world’s biggest BNPL companies include Sweden’s Klarna, Australia’s Afterpay and the San Francisco-based Affirm.

Apple has also hitched a ride on the BNPL bandwagon. It introduced the “Pay Later” programme in the US last year that will allow users to split their purchases into four payments over six weeks with no interest or fees.

The service will allow users to apply for loans ranging from $50 to $1,000.

Global BNPL transaction values are projected to grow to $576 billion by 2026, up from $120 billion in 2021, according to data analytics company GlobalData.

BNPL accounted for 5 per cent of global e-commerce transaction volumes last year and is expected to grow at a compound annual growth rate of 16 per cent between 2022 and 2026, FIS’s Global Payments Report 2023 said.

Ms Jayaprakash mainly uses BNPL to buy clothes and furniture and has not missed a payment yet.

“So technically I could purchase something that costs Dh2,000 or Dh4,000 using BNPL, but I’d rather not considering it’s outside my budget,” she says.

Changing spending patterns

BNPL has smoothened out consumer spending throughout the month, rather than seeing very spiky behaviour around salary days, according to Hosam Arab, chief executive and co-founder of Tabby.

“We’ve seen more spend move from less convenient cash and credit cards towards BNPL given the fact that it is more customer-friendly and transparent,” he says.

Tabby has 12 million registered users and 40,000 active merchants across Saudi Arabia and the UAE, with the business split 70 per cent in the kingdom and the rest in the Emirates.

It works with big retailers such as noon, Amazon, Shein, Ikea and Temu, and retail groups like Majid Al Futtaim, Landmark and Chalhoub, among others.

While early adopters of BNPL were Generation Z and millennials, older users are also now switching to it, Mr Arab says.

Spend has also moved away from being largely discretionary.

“It is a broad spectrum of products that people are buying on BNPL. Initially, we started with beauty and fashion as our core categories,” he recalls.

Tabby now also covers home decor, mother and child, car parks, beauty parlours, dentists, travel and insurance.

The company carries out soft affordability checks on customers, which assesses the likelihood of them being willing and able to repay, Mr Arab tells The National.

Tabby doesn’t always check traditional credit scores, although it has the ability and right to do so, he says.

“We only access that information in certain cases. However, we do have the right to report delinquencies to the credit bureaus across both markets and this is something we do.”

Being a credit business, Tabby deals with defaults like its peers.

However, its delinquencies and defaults are lower than global benchmarks for BNPL and that of other credit providers in the region, Mr Arab says.

“This is because the success model is based on underwriting a transaction rather than underwriting a consumer. We are very, very careful to only give credit where it is likely to be repaid,” he explains.

“Our success is based on the fact that customer pays back on time. If customers are delayed, we usually do not charge any additional interest fees that accumulate over time unlike existing credit models where the customer’s delinquency is a good thing for the provider.”

Tabby has its own collections process where it reaches out to customers with reminders.

The average BNPL transaction size in the region is between $150 and $170, considerably lower than outstanding amounts on credit cards, according to Mr Arab.

While the regional BNPL market was overcrowded when funding was plentiful, it has largely consolidated now.

Tabby’s co-founder sees potential opportunities for players in certain niches and verticals.

“While there is large opportunity for BNPL in retail across the board, it’s not that straightforward for new players to come in, given the size of incumbents,” he says.

Tabby intends to double down on the markets it operates in and broaden product offering to merchants and customers. It does not have plans outside the region.

“Some of the challenges we faced early on were uncertainty around regulations. BNPL has typically been a regulated industry, however when you come up with a new product, it takes time for regulations to catch up,” he recalls.

Ensuring the right customer awareness about a new product is also a challenge, he adds.

“You want to make sure that your product is not being misunderstood. The idea here is not to push consumers towards overspending. We want to make sure that consumers treat us responsibly,” Mr Arab clarifies.

Budget hack

Sumit Augustine, a marketing and public relations professional, says she has not missed a BNPL payment because of reminders that she received from the platforms.

“I normally make a BNPL purchase by weighing the pros and cons of the price in question. If it is a smaller amount [Dh200 and less], I usually pay the whole amount, but if it’s higher than Dh200, I try to weigh in if I want to pay upfront or in instalments,” Ms Augustine says.

This helps with her monthly budgeting. If she has upcoming payments like school fees and phone bills, she makes them upfront and then uses BNPL for her shopping expenses.

“That way, my more important payments are paid in full, while I pay for my splurge shopping in instalments,” she explains.

Carol Glynn, founder of Conscious Finance Coaching, says consumers often choose BNPL arrangements over credit cards as they like the idea of delayed payments, especially when it is interest-free.

It can make larger purchases seem more manageable and less daunting, she adds.

Additionally, the application process for BNPL can be quicker and less stringent than that for a credit card.

For individuals mindful of their credit scores, BNPL can appear as a less risky option since many services don’t perform hard credit checks, she explains.

Ms Glynn says it is also common to utilise BNPL services purely to manage cash flow, even when the individual has the cash available to pay for their purchase in full.

“This type of payment is advantageous to individuals who have large, unforeseen expenses and they don’t have an emergency fund to pay for it. An example is having to replace a kitchen appliance such as a refrigerator, but you haven't saved in advance for this large cost,” she points out.

The fine print

However, it’s important for consumers to be aware of the terms and conditions attached to each BNPL transaction.

Late payment fees tend to be substantial. The interest that may accrue after the initial interest-free period is not always clear at the point of purchase but tends to be higher than credit card interest rates, Ms Glynn warns.

Users need to understand the impact of missed payments, not just in terms of the fines and interest they will incur, but also on credit scores.

“Consumers should also be mindful of the combined monthly instalments due on their purchase when spread over instalments, as it may encourage spending beyond their means," she says.

"Having many BNPL arrangements in place can create confusion and cause the individual to lose clarity over how much they owe each month. I've seen this result in them inadvertently overstretching themselves financially."

Staying informed, spending intentionally and reading the fine print can ensure that BNPL remains a helpful tool rather than a financial burden.