SA fintech firms fail to profit from ‘high risk’ BNPL models

While the buy-now-pay-later (BNPL) payment offering has seen tremendous growth in South Africa, most online retailers and BNPL providers have not been able to reap significant profits from the flexible, high-risk payment model.

This is according to fintech experts discussing e-commerce trends at a recent webinar hosted by online payment gateway provider Payfast.

Over the past few years, BNPL offerings have gained popularity in SA and other parts of the world as retailers compete aggressively to retain a larger share of the booming e-commerce market. This has seen major global firms – including PayPal, Apple, Amazon and Square – jumping on the bandwagon.

As the 2020 e-commerce boom induced by the shutdowns continued over the past two years, BNPL offers have further turbocharged all domains of e-commerce in SA, according to experts.

Fintech players have previously told ITWeb that BNPL financing models will lead to an explosion in the local e-commerce sector, as more cash-strapped consumers take advantage of the option to buy immediately and pay later – on a split payment plan – without incurring any interest. (unless the payment is late).

Using BNPL payment options is seen as convenient for consumers as they are often easier to get approved compared to traditional credit cards and the short term loan is offered to a customer without a credit card. However, some local fintech firms have encountered pitfalls, mainly as a result of a lack of regulation and some consumers being unable to service their ballooning debt, according to Payfast.

“BNPL is an unregulated product in South Africa at this point, and very much worldwide,” Payfast MD Brendon Williamson said during the webinar.

“We have been watching what it does and how it is going to work in the future. It is no secret what the shortcomings of BNPL are [reported] In the press. We have seen massive losses reported by many BNPL companies, also in terms of credit scoring, and there are many things related to BNPL.”

Critics have previously questioned the BNPL business model, saying despite strong consumer support, the credit product is not based on a sustainable business model. There are increasing demands for regulation and deeper questioning of the business model.

According to reports, while consumers worldwide flocked to BNPL loans, some major global players lost billions of dollars, such as Swedish fintech startup Klarna. Its valuation fell from $46 billion to $30 billion last year. BNPL giants Zip and Afterpay reported net losses of hundreds of millions in 2021.

Chris Wood, regional MD South Africa for Network International and Payfast MD, Brendon Williamson.

According to Williams, the non-existent regulation in SA results in a lack of obligations for providers to thoroughly check the borrower’s ability to repay the credit, as part of the creditworthiness assessment. This in turn has led to payments being delayed, or creditors not being able to repay their loans in full.

Another problem sellers often face is that despite online shopping platforms paying a commission for each sale made using a BNPL platform, they are usually prevented from passing this cost on to consumers via a “no-surcharge”- clause in the contract with the BNPL supplier. .

Unlike other loans, such as credit cards, where additional fees are charged, BNPL providers often profit from late customer payments. Where there are no late payments, no profit is made.

South African-based Payfast accepts online payments from local and international buyers across more than 80,000 online merchants. The parent company Network International offers BNPL in collaboration with banks.

While SA’s payments industry is generally heavily regulated, the fintech firm says it had taken a decision to specifically work with banks, such as TymeBank, on BNPL offerings, to minimize the risks associated with the BNPL model.

“We’ve partnered with a bank specifically because we think it’s a more regulated area from the perspective of being run by a bank,” explained Chris Wood, regional MD Southern Africa for Network International.

“By allowing banks to have all the information about their customers and see what their risk profile looks like across multiple products – this is a much better play in my mind than independent entities trying to manage risk when they don’t have the full portfolio of a customer .

“The banks know their customers better. Many payment companies want to be everything to everyone.”

The strong uptake in the BNPL credit offering has been driven by several factors, including the boom in SA’s e-commerce industry, the acceleration of internet and mobile penetration, and a decline in consumer spending power amid the sharp economic downturn.

In 2022, e-commerce passed the R50-billion milestone in SA, as overall e-commerce growth reached 35%, according to a study conducted by World Wide Worx, in partnership with Mastercard.

Payflex, one of SA’s major BNPL providers, tells ITWeb that their research shows that in SA, online stores offering Payflex as a payment option reported average basket sizes of 20% to 30%, across all merchant categories. In addition, more than 70% of Payflex customers made a repeat purchase.

Paul Behrmann, founder and CEO of Payflex, comments: “BNPL is driving consumption through higher basket values ​​and payment frequency. The latest Payflex consumer behavior survey shows that as many as 80% of customers return to SMB to buy more. These are good news for businesses trying to grow their customer base, retain customers and increase their sales revenue.”

Behrmann explains how the payment platform handles risk, pointing out that Payflex takes all the risk of non-payment, while merchants are paid in advance the next business day to help with cash flow.

Asked if SA could see the same downward spiral experienced by global loss-making firms BNPL, he points out: “It’s hard to predict, but possible. South Africa follows international experience. BNPL suppliers are in growth mode, so they are generally unprofitable, with increasing cost of acquiring customers.

“Payflex attaches great importance to only accepting good risk customers who are very likely to repay the advance. The average value of BNPL purchases is R1 200, with installments repaid over six weeks, so it is not suitable for big ticket items.”