Are Nigerian fintech startups able to profit from the buy-now-pay later model?

Fintech platforms are constantly looking for new ways to serve their customers. This reinforces the BNPL (Buy Now, Pay Later) that many have begun to use.

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In the last few years, this new credit model has gained more attention, primarily because of the delayed payment and instant gratification it offers to a growing number of creditors.

These services accomplish what they promise. BNPL shoppers typically use short-term loans to purchase their goods and then agree to a repayment schedule.

These services allowed Nigerians to take out purchase commitments for their mobile phones. Credit agreements were then extended to cover a few household items.

The growing discussions about the atrocious behavior of credit-offering platforms in the nation have undoubtedly put a spotlight on BNPL fintechs as well as their modus operandi.

The popularity of these services is also raising questions about the amount of debt these BNPL companies are allowing people to take on, and how fast it’s happening.

What is a BNPL?

BNPL credit models are a long-standing feature of the Nigerian credit market, but they are slowly being recognized by fintech credit lenders.

BNPLs are instalment loans that don’t charge interest for short-term, small-term purchases. These loans are similar to the ones used by companies to give away electronics and household goods to employees with the intent of recovering the amount in pieces over a specified period.

It’s like paying for a dishwasher by instalments. But instead of putting it on hold until you pay the full amount, users can take it and then pay later.

The only difference between BNPL credit purchases and other credit purchases, is that BNPL doesn’t impose interest upon overdue payments.

Instead, BNPL lenders assess customers’ credit ratings by matching monthly income with monthly spending. This provides a simple, straightforward, and easy-to-understand approach to repayment options. This is also a cost-effective way to acquire assets.

Previously used business model

Although BNPLs have been around for a few years, they are slowly being recognized by credit financing platforms as they look for sustainable business models.

A popular BNPL model that many people are familiar with is the fintech platform mobile lending solutions. This platform allowed for easy acquisitions back in 2019.

The BNPL payment business has seen rapid growth in Nigeria over the past four quarters of 2021 due to increasing eCommerce penetration and the economic downturn induced the COVID-19 outbreak.

The Q2 2021 BNPL survey shows that BNPL payments are expected to rise by 67.4% each year, reaching US $341.9 Million in 2021.

Reports also indicate that BNPL payments will be used more frequently as Nigeria’s BNPL sector continues to grow in the long-term.

The projected CAGR for 2021-2028 is 26.2%. This means that the country’s Gross Merchandise Value (BNPL Gross Merchandise) in 2028 will be US $1741.1 million, up from US $204.3 million in 2020.

What are BPNL offerings for

Fintechs are gaining almost all the value because banks have been slow to respond or not interested in point-of-sale financing.

The credit financing model has provided value to all parties, the BNPL company and merchant.

As with any loan, the consumer is responsible for making timely payments in order to maintain a good credit score. However, BNPL provides a convenient option for individuals to acquire asset ownership.

Individuals can get BNPL financing to purchase a dishwasher for N100,000. This is a much better option than making a one-time payment.

Among the BNPL merchants in Nigeria that offer unique financing options for Nigerians are Altmall CreditClan, Credpal and CDCareNG.

Is BNPL‘s landmine awaiting to explode?

Contrary to traditional financial institutions’ activities, the lack of control between merchants and customers has raised doubts about whether loans are safe or if they could lead to a bigger financial disaster.

These discussions also discuss the potential success of these platforms in Nigeria. These credit models offer credit facilities to customers. But, apart from the many benefits, is this a viable fintech business model?

In Nigeria, which has limited access to formal banks for loans, it is crucial that people are able to get credit and pay them back quickly.

Nigerians are more likely to default on loan repayments, which is a problem that fintech credit providers have to continually combat.

Although this model is novel, it can be difficult to navigate as per capita income stays low. Although this may have made lending attractive, it will result in increased debt collection.

People have been known to take out loans for people with low credit scores. This has caused problems in the repayment process and put pressure on the system. Nigerians have limited access to traditional financial services. It is important that credit can be obtained and repaid quickly.

Nigerians are more likely to default on loan repayments than most credit-offering companies.

This strategy, although unique, is susceptible to stumbling block as long as per capita income remains low. Although this may make lending more attractive, it will also increase the burden on debt collection.

People have been known to obtain loans for anyone with poor credit scores. This can cause problems in the repayment process and put a strain on the system.

BNPL doesn’t just give away money. Participating businesses pay a small fee for BNPL services in exchange to have additional business. However, the terms and disclosures to the consumers are not clear.

Nigerian customers are particularly concerned about the price discrepancy between the selling price and the price offered by the BNPL merchant.

Technext.ng spoke with Desoye about his experience using BNPL credit financing to buy a Samsung smartphone. He revealed that he was only charged 185,000, instead of the regular retail prices of 160,000 naira to 165,000 naira.

Merchants should also be concerned about the possibility of default, since Nigerian customers are known to default regardless of credit agreements.

Although BNPL is marketed to be an interest-free option to credit card payments and has been criticized by government authorities and consumer protection groups, it has been questioned whether it could encourage clients to overspend and reduce client risk.

This model’s ease of asset acquisition could lead to impulse spending, especially for those with low financial prudence.

We cited an example where the user spoke out to us that claimed he was tempted to purchase a similar smartphone for his wife after completing the first payment, even though it would have been cheaper. The relative ease of purchasing the device was too tempting to ignore.

The race to find BNPL financing options is just as intense as any other country. It’s estimated that $680 billion will be generated by the BNPL sector in 2025.

This financing model will continue to be attractive to millions of people who are turning to digital funds as a result the economic effects of the coronavirus pandemic.

Firms could outcompete other firms and become market leaders. However, customers’ needs will increase in tandem with the rise of ecommerce. BNPL provides more credit financing options.

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