I usually write my Christmas list in July and start looking for deals. I buy my gifts by November, especially Black Friday, to take advantage of good deals. I love Amazon; I can compare prices and save my list year round.
This year I bought a lot of things (I can explain). When checking out, I noticed that Amazon gave me three payment options:
- Use a card, 5% cashback.
- Pay in equal installments without interest for 12 months.
- Pay in equal installments without interest for 18 months.
Yes, no interest. No APR, just the total divided by month. If your bill is $ 500, you pay $ 28 for eighteen months. I chose the eighteen month option and the monthly bill was so low that I added a few extra items as my budget might have this level of monthly payments (don’t do this at home).
I wondered why Amazon was so nice? Why do they offer me the option of buying from their site and forfeiting the interest on my purchases if I use their credit card?
So I decided to do some research on the world of Buy Now Pay Later (BNPL).
Buy now Pay later
Buy Now Pay Later (BNPL) are interest-free installment loans offered for small, short-term purchases. Think of it as an installment payment for a dress, but instead of setting aside until you’ve made full payment, you take the dress but pay later. The difference with BNPL and other credit purchases is that overdue payments are not charged any interest.
BNPL provides a simple, easy-to-understand, and convenient way to budget by matching monthly income to the consumer’s monthly expenses. It is also an inexpensive method of acquiring assets. An Accenture report on the BNPL industry indicates that users of BNPL services choose not to own credit cards because they want to avoid interest, fees and debt. The Accenture report states that “spending for BNPL in the United States has increased 230% since the start of 2020”. Figure 1 shows that BNPL is best suited for small purchases.
Figure 1. Potential cost to customers for different types of credit
The main advantage of BNPL for consumers
The advantage of BNPL is its consumption smoothing effect. A television for 100,000 is a big purchase in any currency; however, paying N 8,333 per month for a year for the same television is easy to digest and results in more purchases. Just as I purchased more items because my monthly bill was lower than my spending target, Accenture confirms that the value of “cart sizes” was 17% higher when BNPL was used.
Nigeria’s low purchasing power
Nigeria’s minimum wage set in 2019 is around 30,000 naira, or about $ 72 per month using official exchange rates. As of this salary, the average Nigerian family, according to the National Bureau of Statistics (NBS) report titled “Consumer Spending Patterns Report for 2019”, spends 57% of their income on food.
Food inflation has reduced the purchasing power of Nigerian consumers. On Jumia, the online retailer, a 50 kg bag of rice sold for N 27,000 to N 33,000. This cost is equivalent to the monthly minimum wage in Nigeria. Manufacturers have attempted to address the declining purchasing power of the Nigerian consumer by reducing the quantity per package of their products. Thus, the markets are full of single-use sachets with smaller quantities offered.
On the Jumia website, you can buy a 10 kg bag of rice with peanut oil and seasoning for about 18,000 N. It is cheaper to buy the 50 kg bag, but many Nigerians cannot afford the 50 kg bag. So, in this case, “being poor becomes more expensive”. BNPL can help you solve this problem.
How BNPL solves the problem
BNPL, while creating $ 590 million in cost savings, enabled merchants to earn $ 8.2 billion in new revenue, according to the Accenture report. When traders offer BNPL to buyers, they buy more. The Accenture report profiles Afterpay, a BNPL provider. It indicates that average traders got 13% more new customers when BNPL was introduced.
BNPL can be a win for consumers. A Nigerian consumer can buy the 50 kg bag of rice and spread the payments over 12 months, at N 2,500 per month. The installment payment eliminates the need for big savings and allows for an interest-free repayment plan that matches monthly income. This repayment plan increases the number of households that can buy 50,000 bags of rice, thus increasing the income of traders and farmers. Many families contribute to the purchase of a cow and the sharing of the meat because a family cannot afford the cash cost of a cow. With BNPL, a household can buy the same cow without the need for a large immediate down payment.
BNPL vs credit cards
Merchants have long embraced plastic through debit and credit cards to increase their income by providing consumers with more choice at the point of payment. BNPL extends this choice, but the business model directly challenges the concept of traditional consumer credit, especially credit cards. For example, I choose to pay my Amazon invoice with the Affirm option (Affirm is a BNPL provider who has signed an agreement to offer this service to Amazon customers). The Amazon credit card I use offers 5% cash back plus 30 days with no APR charge. Still, Affirm offered 18 months at no cost apart from my monthly bill. As I mentioned, I increased my purchases because of the offer. If I had had to pay a fee or an annual percentage rate (APR) on my purchase, psychologically, I would have avoided making more purchases.
The Accenture report tracks the adoption of BNPL in America. In Figure 2, we see a chart of US consumer adoption as of January 2020. BNPL has a massive adoption rate of 230% with just 43% through traditional credit cards. Consumers save the equivalent of $ 6 per order by using Afterpay, which translates into savings of $ 459 million with Afterpay alone. BNPL users are also twice as likely to make refunds as credit card users.
Figure 2: BNPL adoption in America
The Nigerian BNPL ecosystem
Nigeria has BNPL providers including Easybuy, Credpal, CDCareNG, Altmall, CreditClan and Carbon Zero. I haven’t used them, but it shows that BNPL has gained a foothold in the Nigerian market.
The Nigerian BNPL has succeeded in personalizing its offer. CreditClan, for example, is building a niche in BNPL education, allowing monthly payment of tuition fees. Femi Bejide, the founder, says they also offer monthly rent payment plans as part of their BNPL plans. In terms of growth, even with systematic headwinds, they grew Quarter over Quarter by over 100%.
A critical consideration for Nigerian consumers is the price difference. At the same time, traders have the risk of default as their primary primary concern. Overall, Femi believes BNPL is a $ 2 trillion market space and Nigerian BNPL companies are barely scratching the surface of the potential market.
Is BNPL a threat to traditional banking in Nigeria? More specifically, consumer credit? In my opinion, I say yes because of the ease of adoption. CreditClan, for example, can approve a loan in 3 minutes, according to its founder. Ease of obtaining credit and repaying is critical in Nigeria when, according to data available from the Enhancing Financial Inclusion and Access (EFINA), less than 5% of Nigerians have accessed a loan from a banking institution. formal.
How to use BNPL
Link BNPL purchases to your budget. If you spread out the payments, your cash balance will increase because you are not making immediate payments. This money is technically not yours, but you can save it in a safe investment like a bank deposit, don’t spend it. BNPL is simply the reversal of tradition, and you usually save rather than spend; now you spend and save. Match expenses to a budget.
It’s tempting to think of BNPL as an emergency fund to cover unforeseen but very critical expenses, don’t. The zero interest rate only applies over the covered period.
I would deploy BNPL on purchases that can be amortized over the chosen period. BNPL’s advantages only come into play if the consumer can reimburse the outstanding amount within the reimbursement period.