Credit cards are a tempting way to impulse buy and worry about the costs later. But if that credit card bill comes in and it cannot be paid off, the late fees and interest quickly rack up, leading to a situation of spiralling debt. A new "buy now, pay later" trend emerging internationally – and now in the UAE – allows consumers to make purchases without paying the full amount upfront, without being charged hefty interest and without a credit card. Merchants are still protected through credit risk checks, late fees and blocks on customers who have defaulted. These are not large purchases, like cars and homes, but everyday splurges on fashion, beauty, furniture, electronics and travel.
"Our ethos is to solve an existing problem in the market, because on the one hand you have customers who are … screaming for some sort of alleviation of costs and they want instalments without APRs [annual percentage rates] and without all the hidden fees," says Tariq Sheikh, founder and chief executive of postpay. "And on the other side you have retailers who are battling to drive conversion, average order values, and reduce return rates as well." Both postpay and Tabby unveiled their services earlier this year and have each partnered with around 20 retailers so far. Postpay, which raised $500,000 (Dh1.8 million) in seed funding, is in the midst of a new funding round, while Tabby just raised $7m in funding, bringing the total to $9m, to fuel growth and expand to Saudi Arabia.
Spotii went live in April, has 11 retailers on its site and will be announcing a funding round in the coming weeks.
The concept is gaining in popularity in the UAE, especially in the Covid-19 era, when personal finances are fragile due to the global economic recession and merchants are looking to capitalise on the surge in online shopping as people avoid going out to prevent the spread of the virus.
International players in the buy-now-pay-later space include Australia's Afterpay, which also operates in the US, UK and New Zealand; San Francisco-based Affirm, started by PayPal co-founder Max Levchin; and Swedish payments tech unicorn Klarna, which has 7.85 million customers in the US. However, consumers should be mindful that "there is no such thing as a free lunch", says Steve Cronin, founder of DeadSimpleSaving.com. "The danger is that you weaken the mental link between purchasing and paying, so you could go on a big spending spree, buy things you don't really need or can't afford, and then regret it later," Mr Cronin says. "It's very important to make sure that you will be able to pay the instalments in full and on time, otherwise you will incur fees." He recommends only buying something if you have at least 50-75 per cent of the purchase price readily available in cash or other assets. Customers should also be confident they can make payments in the event of job loss or a pay cut. "Such problems can easily tip you into a debt spiral, especially if you are already making credit card payments," Mr Cronin adds. Here we outline six new buy-now-pay-later offerings in the UAE:
“The inspiration for postpay was being fed up with the financial institutions charging fees and interest on the fees,” says Mr Sheikh, an entrepreneur and former management consultant, who cofounded the company in July 2019 with chief technology officer Dani Molina.
Postpay offers several options depending on the retailer, including splitting payments in two – half today and half next month – or in four instalments, either every two weeks or on a monthly basis, with no interest. Payments are automatically collected. Home-grown local retailers featured on the site include Squat Wolf, Dubai Audio, Home and Soul and Eggs & Soldiers, spanning sports apparel, high-end audio equipment, fashion, home furniture and mother and baby products. Mr Sheikh says they will also be announcing some "bigger retailers" soon. Splitting payments in half is popular with cash-strapped millennials and Generation Z, says Mr Sheikh. Customers only need a debit or credit card and an Emirates ID, and are given an instant approval decision.
"There are 'disincentive fees' for not paying on time, but they never amount to more than 25 per cent of the purchase price – and that's really in the worst-case scenario," Mr Sheikh says. There is a fee upon non-payment and then another fee after 10 days, up to the maximum 25 per cent.
Postpay takes on the risk of customer non-payment, but also reaps any late fees and takes a percentage of the transaction from its retailers. "We pay [retailers] before we collect all the money, so it's an incredible amount of value for them," Mr Sheikh says. "If a customer doesn't pay, there's no implication on the retailer." Mr Sheikh says its customers are "generally quite good" about paying on time and stresses that people should "use postpay as a budgeting tool". If customers aren't sure about the longevity of their income, "they should be taking the shorter buy-now, pay-later options", rather than taking on debt for three months or longer, he says.
Tabby allows customers to purchase products online using only their mobile phone number and email address. They can check out without entering their credit or debit card details and can choose to pay within 14 days or agree to interest-free instalments for up to six months. "It's interest-free on the customer," says Hosam Arab, co-founder and chief executive of Tabby. "Who ends up paying for this is the merchant. Every product will have a different commission rate. The longer the tenures will be a bit more expensive for the merchants, but they also drive traditionally more expensive transactions."
If a customer misses a payment, a late fee of Dh15 or 15.35 Saudi riyals is charged 15 days after the order is delivered. The fees then double for every two weeks until the overdue payment is settled, but it is capped at the third late fee. "We're not in the business of making money off late fees," Mr Arab says. In addition to setting a cap, "we don't allow a new customer to make a second transaction before we know they're able to pay their first one".
The idea for Tabby came from some of the "obstacles" Mr Arab – formerly the chief executive of online fashion retailer Namshi – encountered running an e-commerce venture in the past. The biggest issue is cash-on-delivery (COD), a payment method still used in over 70 per cent of transactions, Mr Arab says, which results in poor cash flow and a high return rate. Another problem is driving customer conversion and reducing dropout rates. Making the payment process smoother "is much cheaper than the other two options, which are discounting and marketing", Mr Arab says. The company has partnered with over 20 e-commerce retailers on its site, including Abdul Samad Al Qurashi in the beauty sector and Souqalmal.com for insurance.
It recently signed an agreement with Apparel Group, which includes brands such as Tommy Hilfiger and Aldo.
The name “Spotii” evolved from “spot me” – slang for “lend me”, as in “spot me some cash”. Co-founded by siblings Anuscha Iqbal, the chief executive, and Ziyaad Ahmed, chief operating officer, the site went live with merchants in April.
Spotii allows consumers to split their purchases in four interest-free instalments with the first 25 per cent paid immediately. Customers need to enter an e-mail, debit or credit card, and a mobile number, and they get instant approval.
The platform earns revenue from the merchants, who pay a percentage of the order value. Mr Ahmed claims the late fees charged by Spotii, capped at either 25 per cent or Dh40 (whichever is lower), are “the lowest in the market”.
“You do not want to end up profiting off of people’s bad behaviour…You want to be able to encourage responsible spending,” says Mr Ahmed, who previously served as the interim US chief financial officer for Afterpay in San Francisco.
Spotii’s retail partners are mainly homegrown brands with a focus on fashion, beauty and lifestyle. They include apparel brand Khaadi, which has 3 million instagram followers; pre-owned luxury fashion marketplace Riot; and Moroccan home décor brand The People of Sand.
Aramex has rolled out the new Aramex Smart service with the tag line "Unbox First. Pay Later", allowing customers to pay for a purchase 14 days after receiving it.
“With Aramex Smart, we aim to support businesses that wish to grow their online sales channels, and improve the online shoppers’ overall experience, especially during the current unprecedented challenges brought by Covid-19,” said Bashar Obeid, chief executive of Aramex.
He said the solution will help “boost growth in the digital economy and support resurgence in retail demand”.
The option is available for all e-tailers currently selling into the region. Aramex is starting the service in Saudi Arabia, followed by the UAE next month and others "in due course", Arun Singh, head of Aramex Smart, told The National.
E-tailers pay a transaction cost for Aramex Smart, while it is free for consumers as long as they pay within 14 days.
Approved customers do not have to enter their credit card details and can pay later using either bank transfer, credit card, debit card, PayPal or digital options in Saudi Arabia, such as Sadad, Mada and STC Pay. They also have the option to pay in cash at select Aramex outlets.
If customers miss a payment, Aramex will levy an administrative charge of 10 Saudi riyals (Dh10) to follow up and the same charge after four weeks from the due date. After eight weeks, access to Aramex Smart will be put on hold.
Founded in 2016, Rise works with global partners to offer savings, credit and insurance products targeted towards low-income migrants. The FinTech tied up with Carrefour in December to offer instalment plans for products, such as electronics and appliances, ranging from Dh1,500 to Dh5,000. The interest depends on the tenure, but customers usually end up paying an "affordable" 10 per cent over a five-month period, says Rise co-founder Milind Singh. Customers do not need a credit card, which is important for migrant workers earning less than Dh5,000 who would not qualify for one. Last month, Rise partnered with HomesShopping.pk, an e-commerce marketplace in Pakistan, to allow overseas Pakistanis to buy goods in their home country by making payments in instalments in their country of residence. A similar interest charge to the Carrefour products applies. "We are more focused on the migrant segment, so our buyers are not buying lipstick or an expensive bag," says Mr Singh. "I believe there is a need on all sides of the spectrum."
Financial comparison website Souqalmal.com is offering monthly instalment plans on car insurance for the first time, instead of having to pay on an annual basis. Instalments start at Dh199 with the choice of paying over three, six or 12 months.
The full premium amount is not blocked on a customer's credit card, which means it will not affect their credit limit. "In the current economic scenario, customers are actively looking for ways to preserve cash. But standard easy payment plans on credit cards may only be a half-baked solution to their cash crunch troubles," says Ambareen Musa, chief executive of Souqalmal.com.
“Even if they were to convert a big purchase into a regular instalment plan on credit cards, the credit limit available to them would be reduced, based on the total outstanding amount of their purchase,” she says. “Ultimately, this leaves them with a more limited access to credit and lesser financial freedom.”
The customer pays a 25 per cent down payment of the total payable amount, which includes the insurance premium and a "processing fee". For a 12-month tenure, for example, the difference between the upfront premium and the total amount is 18 per cent. While that is still quite high, the average yearly interest rate on credit cards is around 40 per cent and car insurance is "an unavoidable expense if you own a car in the UAE", Ms Musa says.