Gulf banks fight back to beat buy-now-pay-later advantage

• Checkout competition intensifies
• New payments infrastructure
• Credit or splitting payments

Gulf banks are moving aggressively to claw back billions of dollars in market share from buy-now-pay-later fintechs, turning to new payments infrastructure to reassert control at checkout, according to industry executives.

Visa is working with lenders in the UAE and Saudi Arabia to expand its “Installment Solutions” platform, which allows credit cardholders to split payments into interest-free installments – mimicking the core appeal of BNPL services.

“We’ve set up the infrastructure for banks to offer customers the choice between buying on credit or splitting payments,” Godfrey Sullivan, Visa’s head of products for Central and Eastern Europe, Middle East and Africa, told AGBI. 

“Consumers love it, especially Gen Z. We see regional BNPL players absolutely killing it.”

BNPL does not sit comfortably with the traditional bank credit model as it is short-term, interest-free and merchant-funded. 

But with the likes of Tabby and Tamara handling up to half of checkout volumes on ecommerce platforms such as Noon in Saudi Arabia according to Visa, lenders are under pressure to defend their position or risk losing an entire generation of borrowers.

In the UAE and Saudi Arabia BNPL adoption outpaces credit cards by around 10 percentage points, research by Synapse Analytics says.

BNPL services in the UAE are expected to surpass $2.5 billion in revenues this year, with Saudi Arabia forecast to hit that milestone by 2030, Research & Markets data shows. 

Globally, McKinsey estimates banks are losing more than $10 billion in revenues annually to BNPL businesses.

“It will be challenging for banks to reclaim market share from BNPL providers,” said Armineh Baghoomian, the head of Europe, Middle East and Africa at San Francisco’s Partners for Growth, which provides debt financing to Tabby.

Banks hold advantages with established customer and merchant networks and strong balance sheets, she said, but BNPLs have already built strong relationships with merchants, who are often reluctant to offer too many checkout options. 

“Overly cautious risk models in underwriting consumers can also cause problems and diminish the appeal of BNPL’s flexibility” Baghoomian said.

Some Gulf lenders have moved early. Abu Dhabi Islamic Bank partnered with Spotii in 2021 to launch a virtual BNPL card, while First Abu Dhabi Bank introduced the SlicePay card with Mastercard in 2023. 

Elsewhere, Citi and Lloyds have begun rolling out installment offerings, hoping to retain users, recover merchant fees and sell longer-term lending products.

However, banks have yet to achieve widespread traction.

Pritam Basu, founder of UK-based fintech Boseman, which was an early investor in Drip Brazil, a highly successful BNPL startup, said banks might fare better by embedding BNPL into existing products.

“They could try to build the standard ‘pay in three’ offering into current accounts, similar to UK digital bank’s Monzo Flex where you can pay for anything with your Monzo card and convert it to BNPL later,” he said.

“A Monzo Flex-style solution also means you are not tied to merchants accepting BNPL for anything you buy,” he said.

However, the experience of dedicated BNPL players is “hard to beat so they need to get that right”, Basu added. 

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Even for fintechs, the economics are not simple.

“BNPL is often a loss leader,” Basu said. “As rates rise, the fixed commission they charge merchants is hard to move up. That’s why most make money on their longer term credit offerings where they charge interest.”

Tabby, backed by Abu Dhabi sovereign wealth fund Mubadala and valued at over $3 billion, now serves 15 million users and says annualised transaction volumes exceed $10 billion. 

The unicorn, which might look to sell shares to the public next year, recently expanded into physical retail with its Tabby Card.

Baghoomian said that over time, it is also plausible that BNPL providers move upstream, expanding to include deposits and broader credit offerings, positioning themselves in more direct competition with banks.

“Ultimately, the more likely scenario is partnerships, not full-on disruption, as we’ve seen in other markets where banks are opting to partner with fintechs rather than build in-house,” she said.