Storm clouds may be ahead for Buy-Now Pay-later companies in the MENA region:
These are the business drivers to watch in 2023-24:
1) Cost of Funds going higher:
In 2022, lending rates pegged to the USD have increased. This applies to BNPLs that do not have lending lines secured at a reasonable rate. The UAE Central Bank's base rate is 3.9% as of Nov 2022. Likely to increase to 4.25% or higher.
2) Virtual Credit Card capability:
For example, Tabby and Postpay have virtual credit cards. Not having the ability to issue an open-loop virtual card means no interchange income or loan processing fee on the card.
3) Credit Loss Provisions will mount:
Credit losses tend to increase as inflation begins to bite and layoffs mount in a recession. So do frauds. Non-performing loans for S&P-rated banks in 2013 in the UAE were 3.9% as a percentage of loans advanced. 2013 is only used here as a reference and is not my view on expected losses. Underwriting customers strictly will become necessary.
4) Duration of Credit will have an impact:
A longer duration of credit (12 months as opposed to 3 or 4 months) will result in lower funds utilization annually. BNPL is a velocity business; with quick lending and quick return. If you extend borrowing for a longer duration, your returns get suppressed.
Example: Postpay allows for three installments (shorter duration). Cashew offers BNPL with 12 months of repayment on high ticket purchases (Jewelry, Medical fees, and so on).
5) Type of Products that customers purchase will evolve:
Luxury Products tend to do well in a recession. Consumer staples also tend to do well. Which of these products are covered by BNPL?
What moves will you be making if you are in the management team of a BNPL right now?