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

Sibahle Malinga
By Sibahle Malinga, ITWeb senior news journalist.
Johannesburg, 30 Jan 2023

While the buy-now-pay-later (BNPL) payment offering has seen tremendous growth in South Africa, most online retailers and BNPL providers have failed to reap substantial profits from the “high-risk” flexible payment model.

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

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

As the 2020 e-commerce boom induced by the lockdowns continued over the past two years, BNPL offerings have further turbo-charged every domain of online shopping in SA, according to experts.

Fintech players previously told ITWeb that BNPL financing models would lead to an explosion in the local e-commerce sector, as more cash-strapped consumers take advantage of the opportunity 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 for, when 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 lack of regulation, and some consumers being unable to service their ballooning debts, according to Payfast.

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

“We have been watching what it does and how it's going to function in the future. It's no secret the shortfalls of BNPL that are [reported] in the press. We've seen massive losses reported by many BNPL companies, also with regards to credit scoring, and there are a whole lot of things associated with BNPL.”

Critics previously questioned the BNPL business model, saying despite a strong uptake from consumers, the credit product is not premised on a sustainable business model. There are mounting calls for regulation and deeper interrogation of the business model.

According to reports, as consumers across the globe flocked to BNPL loans, some major global players made losses worth billions of dollars, such as Swedish fintech start-up Klarna. Its valuation dropped 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 Southern Africa for Network International and Payfast MD, Brendon Williamson.
Chris Wood, regional MD Southern Africa for Network International and Payfast MD, Brendon Williamson.

According to Williams, the non-existent regulation in SA results in lack of obligations on providers to thoroughly check the borrower’s capacity to repay the credit, as part of the credit suitability assessment. This has, in turn, resulted in late payments, or creditors not being able to repay their loans altogether.

Another issue often encountered by merchants is that despite online shopping platforms paying a commission for every sale made using a BNPL platform, they are typically prevented from passing on that cost to consumers via a “no-surcharge” clause in their contract with the BNPL provider.

Unlike other loans, such as credit cards, where surcharge fees are charged, the BNPL providers often make their profit through late customer payments. Where there are no late payments, no profit will be gained.

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

While SA’s payment industry is generally highly-regulated, the fintech firm says it had taken a decision to specifically partner with banks, such as TymeBank, on BNPL offerings, in order to minimise the risks associated with the BNPL model.

“We have partnered with a bank specifically because we believe it is a more regulated space from a perspective of being operated by a bank,” explained Chris Wood, regional MD Southern Africa for Network International.

“By allowing the banks to have all the information of 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.

“Banks know their customers better. Many payments companies want to be everything to everyone.”

Mounting consumer debt

The strong uptake in the BNPL credit offering has been propelled by several factors, including the boom in SA’s online shopping industry, the acceleration of internet and mobile penetration, and a decline in consumer purchasing power, amid the sharp economic downturn.

In 2022, online retail passed the R50 billion milestone in SA, as the total growth for online retail came to 35%, according to a study conducted by World Wide Worx, in partnership with Mastercard.

Payflex, one of SA’s major BNPL providers, tells ITWeb its research shows that in SA, online stores that offer Payflex as a payment option reported average basket size increases 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 increases spend through higher basket values and payment frequency. The latest Payflex research on consumer behaviour shows that as many as 80% of customers return to SMEs to buy more. This is good news for businesses trying to grow their customer base, retain customers and grow their sales revenue.”

Explaining how the payments platform manages risk, Behrmann points out Payflex takes all of the risk for non-payment, while merchants are paid upfront on the next business day, to assist with cash flow.

When asked if SA could see the same downward spiral experienced by global loss-making BNPL firms, he points out: “It’s hard to predict but possible. South Africa lags the international experience. BNPL providers are in growth mode, so they are generally unprofitable, with rising costs to acquire customers.

“Payflex takes great care to only accept good risk customers who are very likely to pay back the advance. The average value of BNPL purchases is R1 200, with instalments repaid over six weeks, so it is not suited to big ticket items.”