The emergence of "Buy Now, Pay Later" (BNPL) services represents a disruptive and transformative shift in consumer finance. BNPL's rise underscores its profound impact on global markets, with its Gross Merchandise Value (GMV) projected to soar to $960 billion by 2028. Leading the charge are prominent players such as Affirm, Klarna, Afterpay, and other Middle Eastern players such as Tabby, and Tamara, each reshaping the landscape of financial transactions.

The allure of BNPL lies in its various benefits: fostering financial inclusion, offering interest-free payment options, and unlocking new avenues of growth for merchants. However, it also faces formidable challenges, including mounting regulatory scrutiny and profitability pressures stemming from operational costs.

In emerging BNPL markets including in the Middle East, the trajectory of BNPL hinges on pivotal decisions amid a shifting regulatory landscape and evolving market dynamics. This article aims to provide a comprehensive analysis of the trajectory and development of the BNPL market on a global scale with the ultimate goal of illuminating the key insights and lessons learned from this evolution.

What’s BNPL

In simple terms, BNPL is a payment method that allows customers to make purchases and pay for them over time in installments (typically interest-free).

The BNPL industry, for the sake of simplification, involves three main stakeholders: a BNPL company, a merchant, and a customer as illustrated in the below figure.

When a customer chooses to purchase a product from a merchant, they are presented with the BNPL option during checkout. If the option is approved by the platform, the latter disburses the full payment to the merchant and assumes the complete credit risk associated with the customer.

Typically, customers make the initial installment payment directly to the platform, with the remaining installments settled subsequently. Common payment structures include interest-free installment plans spanning four payments, although certain BNPL platforms may impose late payment fees. Globally, prevalent financing arrangements allow borrowing amounts of up to $1000.

Brief Snapshot of the BNPL Industry Globally and in the Middle East

In recent years, BNPL services have been widely adopted by consumers across the globe. BNPL’s Gross Merchandise Value – GMV (total value of transactions made using BNPL) is expected to rise from $433 billion in 2022 to $960 billion by 2028.

Different leading BNPL players have emerged worldwide, notably Affirm in North America, Swedish company Klarna in Europe, Afterpay in Australia as well as two unicorns in the Middle East: Tabby and Tamara.

BNPL's Leading Players Globally Include the Following Brands

BNPL’s Major Advantages, Risks, and Lessons Learned Globally

Advantages of the BNPL Business Include

• Increased financial inclusion contribution. For example, circa only 30% of Saudi adults have credit cards with many of them without a credit history. BNPL companies have been instrumental in driving demand for financial services upward. This is even accentuated in other countries such as Egypt where only 9.5% of the adult population has a credit history.

• BNPL companies typically offer interest-free solutions to their customers. In case of late payments, some BNPL companies do not charge any fees such as the American BNPL platform Affirm or the Saudi-based Tamara (Shariah-compliant financing).

• BNPL options mean big business for retailers. For instance, UAE’s Tabby reported that merchants using their services have a 33% average increase in average order value (AOV), an 18% average increase in conversion, and a 40% repeat purchase rate.

• For customers, this translates usually to convenient, free, and instant credit that helps them manage their finances.

On the other hand, the BNPL business Entails the Following Risks

• Compared to traditional finance, the BNPL sector is relatively unregulated. Until very recently and on a global scale, BNPL providers have been exempt from consumer credit regulation due to the absence of interest charges. The sector has experienced a significant surge in business, driven by an online shopping frenzy prompted by COVID-19 stimulus payments and extremely low-interest rates.

  This has lately changed with countries such as Australia and the UK leading the race towards regulating their domestic BNPL sector. Concerns about repayment coupled with high inflation pushed the Australian government to regulate BNPL services as a consumer credit product, obliging platforms to carry out background checks before lending. Australia’s reinforced regulation on the sector also limits fees for missed or late payments, along with strengthened warning and disclosure obligations.

  Similarly in July 2023, the UK’s FCA Consumer Duty rules pushed BNPL companies and financial services providers overall to raise their standards in terms of responsible acting with customers as well as regarding open and transparent communication on services they provide. Comparable regulations are also being more and more initiated in other countries such as the United States, Canada, other European countries, Singapore, and Saudi Arabia.

• It is true that BNPL services allow customers to better manage their finances (by distributing their expenses across multiple installments) however, evidence about overspending has been found especially because of the allure of cost-free borrowing that might push borrowers to overspend.

• Another big issue facing BNPL companies is profitability challenges. For instance, American-based BNPL platform Affirm reported an impressive 48% growth of revenues that reached $591 million. However, profitability metrics were disappointing with a net margin of -28.2%. Similarly, Swedish platform Klarna reported FY 2022 revenues of $1.8 billion and incurred a huge net loss of $0.9 billion. In the third quarter of 2023, Klarna however reported a positive $12 million of pre-tax profit.
  The roots of these financial challenges are caused by substantial operating expenses incurred by these platforms, including marketing, administrative, and technology expenditures, among others that have impeded their ability to achieve profitability. Furthermore, the return on assets for BNPL platforms experienced a significant downturn in the 2021–22 period, primarily attributable to the escalating credit losses and the heightened competitive landscape resulting from the entry of neo-banks and major technology companies into the BNPL market.

• As previously mentioned, typical users of BNPL services are Gen Z individuals. Research demonstrated that the majority of these users are under the age of 35, they are tech-savvy and most of the time do not possess credit cards / and have less financial acumen than older generations. Interestingly, studies have demonstrated that BNPL users particularly in the United States are risky: they are highly indebted and have lower credit scores than non-BNPL users. Additionally, BNPL platforms’ customers have higher delinquency rates.

Moving forward, we anticipate that the future of BNPL, particularly in regions like the Middle East, will be influenced by various scenarios, which we will delve into in our upcoming article. Regardless of these scenarios, BNPL companies will need to adapt to evolving market dynamics and regulatory landscapes to sustain the extraordinary growth they enjoy and meet the needs of consumers and merchants effectively.