Can fintechs get Nigerians to buy now, pay later?

BNPL (Buy Now Pay Later) has become the talk of the credit and fintech industry. CredPal’s (Nigeria) recent $15 million raise to expand the scope of its BNPL product, Lipa Later’s (Kenya) Series A, and MNT-Halan’s BNPL (Egypt) launch are just a few data points to show that the appetite for credit (with BNPL as a solution) across the African continent is increasing. 

Even in the face of growing concerns around a tech bubble and global market contractions, there is no denying that fintech, because of its market-enabling and market-creating opportunities, is a big part of the innovation ecosystem in Africa. In turn, credit is a big part of fintech. According to an EY report on the fintech industry, lending accounts for 23% of fintech businesses, coming second to payments, which account for 38%. However, when you break down payments further, 17% are consumer payments and 19% are SME payments, compared to 23% for consumer lending. So, as a single sub-sector, there are more fintechs in consumer lending than any payments sub-category.

As I have argued previously, there are good reasons for the increased buzz around BNPL. The structure of BNPL gives shoppers the ultimate convenience of instant credit access with zero interest rates, and even nearly hassle-free repayment options. By allowing consumers to instantly access a product and defer payment, BNPL helps level the “shopping” field for consumers across income levels and credit access. Thus, it triggers consumer buying behaviour (which is a good thing for stimulating any economy) by reducing the cost of purchase at the point of sale.

And it’s not just consumers that stand to benefit.

The real business opportunity with BNPL is the fact it is riding the e-commerce wave to increase the growth of sales of online retailers. BNPL platforms are appealing to merchants because they encourage customers to shop more. Providers like Swedish based Klarna have reported boosting average order value by 41%, while Affirm claims it increases average order value by 85%. 

The idea is so simple, and it’s quite easy to see how BNPL makes life better for consumers and merchants alike. But how can BNPL players ensure they get value from delivering BNPL services? For me, the short answer is execution. BNPL products can be rather complex, so it is important for operators in the space to pay attention to how they pull it off so they can win the market. 

This conclusion is particularly relevant today because as I mentioned earlier, global markets are anticipating a squeeze. The result has been a slowdown in global venture funding in the US and Europe as venture capitalists clamp down on startups in their portfolios to justify existing valuations. This email from the Uber CEO says it all—for a long time, startups like Uber have been valued based on their growth potential rather than their profitability. Now, this is not to suggest that VCs are asking founders who are building out of Nigeria (or anywhere for that matter) to start proving profitability. However, a seismic shift is occurring, so I want us to talk about how BNPL companies can ensure they achieve product-market fit. That is, as Marc Andresseen puts it, “being in a good market with a product that can satisfy that market”. The concept might seem so simple but in today’s world, it is more important than ever to ensure that you are building a product that people want and are willing to pay for because it is better than existing alternatives. 

A thriving business model

The BNPL model has gained traction in many markets outside of Africa. For example, the Latin American market is huge for BNPL. The region has recorded substantial growth among both merchants and consumers. Here, the BNPL solution is to increase financial inclusion, as prior to BNPL’s entry, Latin American borrowers were subject to exorbitant and hugely expensive credit card fees that priced out a significant proportion of the population. Now, thanks to BNPL players like Kueski Pay, customers can spread purchases over six fortnightly payments, interest-free. What’s crucial to this also is that Kueski customers do not need to have a bank account as they can make repayments in cash at convenience stores. In short, BNPL helps to move financial inclusion targets forward. Side note: we will later see how this also applies in Nigeria’s context. 

Meanwhile, in the US, BNPL has also grown in ubiquity, mostly because these companies have managed to position BNPL products as a substitute for “predatory” credit cards, to a demographic that has become increasingly averse to acquiring debt. Research suggests that while younger millennials and Gen Zs will undoubtedly increase the number of credit cards they own as their income increases and they seek to build credit, the number of credit cards per person for this generation will be lower than in previous generations. The American case is not necessarily about financial inclusion because usage is based on consumer preference and not desperation for credit. According to a Cardify survey, over 75% of US customers use BNPL products despite having the funds to cover the full cost of purchase.

Regardless, BNPL is still a form of credit because it essentially allows you to borrow money from tomorrow to fund today’s purchase. However, while credit card companies earn their profits off the consumer and earn more when balances are carried forward, BNPLs make money in a different way—from the merchants. This is where the importance of understanding the business model comes in. 

To illustrate this more concretely, I looked at Afterpay, one of the world’s leading BNPL providers. In August 2021, Afterpay was acquired by Jack Dorsey’s Square for a tidy $29 billion. Afterpay’s product offers consumers a way to pay for items with only an initial 25% downpayment, and 0% interest. It is worth looking at a global brand in the BNPL space because it can give some indication of what can be built. However, it doesn’t give the full picture when it comes to assessing success in a different market context (we will come back to this later).

Anyway, Afterpay consumers make payments in 2-week intervals across four equal instalments over a 6-week period (payments happen in week 0, week 2, week 4, and week 6). It’s worth noting that other players like Klarna also adopt similar “Pay in 4” models as a way of offering suitable financial arrangements. The approach allows consumers to make purchases more affordable by deferring payments. Klarna even has a “Pay in 30” model that allows customers to order multiple items, and pay within 30 days for only the items they keep. So for example, I can order 10 dresses, and if I don’t like 9 of them, I just pay for the one that I keep.

What is at the heart of these models though, is the merchant fee that is charged. Remember the distinction I drew earlier between credit cards (the incumbents that BNPL players have disrupted) and the BNPL companies themselves? Credit cards make money off consumers, but while BNPL players charge consumers late fees (to encourage faster payment on outstanding balances), data shows that the real profit comes from the 3-5% that companies like Afterpay charge merchants for their service. According to Afterpay’s financials, this merchant fee comprises about 84% of total revenues, while late fees make up about 13% of total revenues.

Merchants matter crucially for the BNPL model because they help build the flywheel. The concept of the flywheel is pretty simple to understand. Coined by Jim Collins in his book “Good to Great”, a flywheel in business is a series of small actions that exponentially increase the momentum of a product or service. It’s how billion-dollar businesses like Starbucks and Amazon have grown. Let’s unpack Amazon’s approach to illustrate this a bit more.

According to Jeff Bezos, all Amazon employees are taught to believe that customer experience is key. Delivering an excellent customer experience every time a transaction happens is one small action that drives traffic to Amazon’s website (happy customer, happy life). This increase in consumer traffic further attracts sellers to put their products on Amazon.com. This then creates a greater selection of products for customers, which leads to more sales and allows Amazon to lower their cost structure and reduce prices. This, along with customer experiences, reinforces the flywheel effect and continues to increase traffic on Amazon.com, which accelerates growth. 

Bringing it closer to home, we can also see this flywheel effect play out with other fintech solutions like M-Pesa, the mobile money success solution in Kenya. Once M-Pesa successfully positioned itself as a cheaper and more accessible alternative form of sending money compared to having a bank account, Safaricom’s growth accelerated as the more people who used it, the more it made sense for others to sign up for it to meet their financial service needs. It only took five years from launch between 2007 and 2012 for 70% of the Kenyan adult population to sign up for an M-Pesa account. For context, it took 115 years for Kenyan banks to provide their customers with 43 licensed commercial banks, 1,045 bank branches and 1,500 ATMs.

Similarly, in the case of BNPL, a provider gains market share by getting more merchants to use their service. This way, customers have more merchants to Buy Now Pay Later from, which will encourage more merchants to adopt BNPL. And so, the flywheel effect is one where the more people who use it, the more it makes sense for others to sign up. 

Again, I can bring this to life by looking at Afterpay.

You see, Afterpay’s biggest selling point are the commercial improvements that brands see after integrating the Afterpay service onto their websites. So, higher average order sizes, purchase frequency, conversion rates, and so on. But to even get the initial base of merchants onto its platform in the first place, Afterpay routinely asks users on its platform what brands they’d like to buy now and pay later from. 

In the US, Afterpay has more than 500,000 fans across different social media platforms. This guarantees a positive customer reception as brands know they can benefit from accessing existing users on Afterpay’s platform. The Afterpay flywheel essentially kicks in by constantly collecting data on what customers want, ensuring the right brands get on, which encourages their competitors to sign up (FOMO effect when they see their rivals enjoying higher sales and larger order sizes). As a BNPL provider, having more brands on your platform keeps your customers happy because they can enjoy product variety without constantly signing up or waiting to get approval to access BNPL services. 

What about BNPL in Nigeria?

Of course, all of this isn’t to suggest that simply adopting Afterpay’s tactic of growing a large fan base online is a surefire way to win the Nigerian BNPL space. The earlier conversation about flywheel effects still apply to the Nigerian market. To drive market adoption, you benefit from providing value to an initial base of users who will encourage more users to join the service.

However, as we pointed out when we covered MTN MoMo PSB’s entry into Nigeria’s mobile money space, context always matters. Essentially, different markets have different rules. So as we think about where market adoptions come from, we need to understand that there is an additional element in the Nigerian market. So unlike abroad where BNPL players can tap into existing e-commerce value chains and credit infrastructure to execute their business, Nigerian BNPL players can’t just do the same.

So what can they do instead to ensure they are delivering Andressen’s much vaunted “product-market fit”?

One useful place to start is the idea of non-consumption, which reveals true market potential. However, a well-known challenge with targeting non-consumption is that it is not always obvious—you basically have to unlock latent (or hidden) demand rather than just focus on a large and existing market. It means you have to look for places where you can bring new consumers into the market. 

For instance, getting a larger cohort of Nigerian consumers to buy normally expensive items goes beyond just improving access to credit for the 4 million (out of 200 million) Nigerians that cannot afford to spend more than $10 a day. That’s less than Ghana (5.2 million) and South Africa (16 million). So, one obvious way to propel the market might come from improving access to credit. According to 2020 financial inclusion data from EFInA, only 2% of Nigerians had access to an outstanding loan from a bank, even though up to 45% of Nigerians had bank accounts. 

But the real market opportunity goes deeper than that. 

You see, it’s difficult to get access to credit in Nigeria not just because it is expensive, but also because of the information asymmetries that exist. 

In essence, BNPL companies are solving non-consumption by solving the underlying information asymmetries in Nigeria’s credit market.

Take CDCare as an example. 

The bootstrapped Nigerian BNPL company adopts a “Hill Type BNPL model” for determining creditworthiness. So instead of customers getting their items at the point of purchase (like we saw with the likes of Afterpay), CDCare actually delivers the item in the middle of payment. The idea is you have to show you are able to make your payment obligations by successfully completing half of the payments (essentially climb the hill). So if you purchased an iPhone from CDCare with a 40-week payment plan, you only get your new Apple product at week 20. CDCare believes that if a person can at least make their first-half instalments, then they can be trusted to complete the rest. It’s pretty similar to the Ajo system, where traders lend each other money after building a credit history within the community. Without the sophisticated systems to validate whether a consumer can pay back or not, Nigerian BNPL players need to adopt some out of the box thinking in order to get the model to work. 

Tobi Odukoya, CEO of CDCare, believes this model can get more Nigerians to adopt BNPL as long as credit infrastructure remains a challenge in Nigeria’s market. Of course, this runs contrary to one of the first principles of the BNPL model: customers get instant gratification while deferring payment. CDCare customers can defer payment but it’s more like middle gratification. Still, this is just one of the many ways Nigerian BNPL companies have had to get creative with proving creditworthiness (and unlocking latent markets) in the absence of credit infrastructure. Carbon, a well-known player in the BNPL space, uses employment records to determine if a consumer can pay back. 

As is well known for any keen observer of the tech ecosystem, scale will always matter. As a BNPL company, you want to get big by getting more people to use credit. In a market that excludes a huge proportion of the population from traditional lending services, this is not necessarily so easy. Since BNPL providers finance the purchases for customers (or at least part of it in the case of CDCare), you could argue that ensuring that customers can payback is a key component of the business model. Therefore, as BNPL players build, the true answer to driving adoption and making the market your own will come from finding the nonconsumption and the product that will do the required job.

Of course all of this is within the context of the global economic downturn when we tend to see consumer spending taking a hit. In the UK, latest results reveal that consumer confidence—a measure for how people view the state of their personal finances and wider economic prospects—has dropped to its lowest level in nearly 50 years. This reflects the cost of living crisis due to rising energy prices (that we are also feeling here in Nigeria). While BNPL is typically regarded as a way to keep consumption steady during periods of economic downturn (because it allows people to spread purchases over time), the fuelling concerns about a global recession offer a true test for the BNPL model and whether it can grow in popularity in the Nigerian market.