As the world went into lockdown last year at the onset of the coronavirus pandemic, a great number of people turned to online shopping, whether for necessity or leisure.
The UAE retail e-commerce market reached a record $3.9 billion in 2020, a 53 percent year-on-year increase driven by the pandemic-led digital shift, while e-commerce accounted for an 8 percent share of the retail market during the same year, according to recent data by the Dubai Chamber of Commerce and Industry.
The e-commerce retail boom, driven by the pandemic, paved the way for the emergence of “buy now, pay later” (BNPL) service providers. While BNPL was already gaining traction as a popular marketing tool before the pandemic, it has now become a last resort for some consumers who are increasingly facing the economic repercussions of coronavirus.
Making it easier than ever to make purchases, buy now, pay later, also known as point-of-sale instalment loans, is a type of short-term financing that allows consumers to divide purchases into monthly installments.
This payment model is not used for large purchases, such as cars and real estate, but rather for everyday splurges on fashion, beauty, electronics and travel.
While consumers traditionally looked at credit cards as a way to buy now and worry about the costs later, these cards do come with a risk of late fees and piled up interest. However, BNPL apps eliminate these risks.
“While cards remain the dominant form of online payment generally, consumers are beginning to experiment with newer forms of payment. Buy now pay later (BNPL) is one example,” shared a spokesperson for Checkout.com.
Growth of regional BNPL platforms
The number of e-commerce platforms offering the BNPL payment model has ballooned during the pandemic, as online shopping skyrocketed.
As of recently, regional BNPL service providers, such as Postpay, tabby, and Tamara, have grown exponentially, attracting regional and international investors.
“The role of buy now, pay later (BNPL) apps has been fuelled by the growth of e-commerce. In 2020, BNPL became the fastest growing e-commerce payment method globally, predicted to account for 9 percent of all e-commerce payments in EMEA by 2023,” says Tariq Sheikh, founder and CEO of Postpay.
Postpay is a UAE-based buy now, pay later platform that uses advanced technology to offer BNPL payment options with zero interest or fees to the UAE and Saudi Arabia.
Talking more about how the innovative platform operates, Sheikh explains: “Postpay partners with retailers across diverse categories such as fashion, beauty, accessories, home and furniture, travel and entertainment and health and fitness. Consumers select Postpay as their payment method upon checkout.”
“They are then free to purchase their desired products or services instantly but ‘postpay’ thereafter in three installments. Additionally, there is no interest or transaction fee as long as each payment can be collected on time. Customers pay the first installment upon purchase, then subsequent payments are collected automatically,” he adds.
Explaining the procedure further, Sheikh says: “The process is simple, with no need to fill out detailed application forms or make lengthy phone calls. We use a screening process to vet first-time customers, which is performed in a matter of seconds using our innovative technology to ensure a seamless customer experience.
“We simply use their phone number, Emirates ID number and a few more details and after approval, customers can make their first payment instantly and receive their order as per normal shipping and a delivery time. The rest of the installments are collected fortnightly.”
The UAE’s retail e-commerce market reached a record $3.9bn in 2020, despite lingering challenges
Adding value for merchants
By allowing customers to spread the cost of their purchases into interest-free installments, BNPL solutions are creating value for merchants alongside customers. Merchants also remain protected through credit risk checks, late fees and blocks on customers who have defaulted.
“What’s most exciting for retailers is that BNPL proves an effective tool to get consumers to buy more,” says a spokesperson from Checkout.com.
“Our data in markets like Europe show that consumers using BNPL tend to buy 50 percent to 200 percent more items per transaction than they do when using other forms of payment. While financing is not a new concept, it’s traditionally been applied to larger-ticket items like cars, furniture, electronics, or home appliances – but not anymore.”
As for Postpay, Sheikh explains that the app is steadfast on supporting merchants as well.
“Postpay doesn’t just provide value and peace of mind to consumers, but it also supports merchants, increasing conversion rates between 20-30 percent, average basket sizes by up to 50 percent, and return customer rates, as Postpay customers tend to return more often,” he said.
“The service also reduces return rates by over 25 percent in a region that struggles with high logistics costs linked to cash on delivery. All of this with absolutely no added risk for the retailers as they get settled up front immediately.”
As the regional BNPL market grows, consumers will increasingly seek it as a preferred payment option. Therefore, retailers have a simple choice – to give consumers what they want or fall behind.
BNPL is also playing a role in helping improve customer loyalty and drive conversions without eroding margins – a more efficient alternative to offering promotions or sales.
“The more retailers that partner with Postpay the larger our economies of scale and the more value we can provide to customers and retailers,” Sheikh adds.
Sheikh also shares how Postpay is playing a role in moving consumers away from cash-on-delivery (COD) payments, which accounted for about 60 percent of e-commerce payment pre-pandemic.
“Steering consumers away from COD alleviates cash flow challenges for merchants, contributing to an overall healthier and more robust retail ecosystem in the region.”
Positive future outlook
BNPL will continue to gain popularity in the region, especially as personal finances are fragile due to the global economic recession, and merchants are looking to remain afloat and capitalise on the surge in online shopping.
Checkout.com earlier this year led a $110m funding round for Saudi payments firm Tamara, one of the Middle East’s largest-ever start-ups.
Sebastian Reis, executive vice president at Checkout.com, says: “As the partner of choice for the region’s leading e-commerce merchants, Checkout.com is always on the lookout for ways to enhance the ecosystem.
“Tamara has rapidly proven itself to be a natural leader in the BNPL space. Our investment in Tamara will help the team to realise their vision and expand rapidly, driving greater conversions for retailers and offer more flexibility for consumers.”
Proceeds of the Series A capital raise, which included both equity and debt, will be used to bankroll Tamara’s expansion across the Gulf markets by the end of this year and then the rest of the Middle East.
Keeping up the momentum in the regional BNPL space, Postpay also recently announced that it had raised $10m from global BNPL leader, Afterpay, and Australia-based venture capitalist partner, AP Ventures. The strategic partnership with Afterpay is set to reinforce its position as the market leader in the region.
“We have also grown our merchant network to include hundreds of international and local brands, including Ounass, H&M, Footlocker, Dermalogica, The Entertainer and Squat Wolf in addition to a number of multinational retail giants, including Alshaya Group,” says Sheikh.
The pandemic continues to affect consumers who have become more price-oriented
Investment of major global partners has demonstrated how these home-grown BNPL platforms, such as Postpay, can provide significant value in the regional market.
“Ultimately, we aim for Postpay to become a household name. We have partnered with Mastercard and the Commercial Bank of Dubai to bring the region’s first virtual BNPL card solution to the Middle East. We are also launching a shopping app to empower our customers even more,” said Sheikh
While consumers of all generations are utilising BNPL tools, millennials and Gen Z shoppers are doing so at markedly higher rates, being averse to using credit cards.
“Our key consumers, namely millennials and Gen Z audiences, have grown tired of the hassle, fees and potential debt that come with credit cards. This disillusion has created an opportunity for BNPL to grow in the region,” adds Sheikh.
“It strikes the balance between the immediacy of purchase and the need for long-term budgeting, which means that consumers are actually buying more but feeling much better about it since they can spread the payment over time with absolutely no interest and no fees,” he said.
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