Cultural factors reduce risk for Gulf BNPL providers

December 11, 2024, 4:46 PM

Buy-now-pay-later soars in popularity
Saudi BNPL use to double by 2028
Tabby and Tamara among Gulf operators

Buy-now-pay-later companies in the US and Europe have endured prolonged losses due to high operating costs and rising customer defaults, but BNPL operators in the Gulf may be faring better thanks to differing market dynamics, according to analysts.

BNPL has soared in popularity in many regions as an easy and cheap form of consumer debt, with credit checks less exacting than for other forms of borrowing.

BNPL annual payments in Saudi Arabia will nearly double to $2.7 billion in 2028 from $1.4 billion in 2023, according to an industry study.

Gulf consumers are “increasingly adopting” BNPL services for online and offline purchases, said a September report by Alpen Capital.

The sector’s expanding revenue and the implementation of stricter regulations to govern the industry “create an attractive funding opportunity for global investors”, Alpen added.

Gulf BNPL companies such as Tabby and Tamara benefit from cultural and religious factors that make customers less likely to default, Abdullah Altamami, partner and CEO at Riyadh’s Merak Capital, told a webinar in late November.

Historically in the Gulf, failure to repay debt has been a criminal offence, which is another reason for low default rates.

Gulf BNPL companies therefore enjoy higher margins and lower risk than their counterparts in other regions, Altamami said.

Such factors are helping attract more private equity and venture capital investors to Gulf tech-based companies, he added, declining to comment further to AGBI.

Tabby, a BNPL provider founded in the UAE but now based in Saudi Arabia, raised $200 million in Series D funding last year. This valued the company at $1.5 billion.

Saudi Arabian rival Tamara raised $340 million last December in Series C funding that valued the business at $1 billion. Its backers include the kingdom’s Public Investment Fund, London’s checkout.com and the US investment business Coatue, which has invested $27 billion worldwide.

These investments come despite growing worries over BNPL’s long-term viability. For merchants, costs are high.

A December 2023 report by the Bank for International Settlements found that in the US and Asia-Pacific, merchants pay fees amounting to nearly 5 percent of purchase costs to BNPL providers. That compares with 2.5 percent for credit card transactions.

BNPL users tend to have riskier credit profiles, are typically younger and less educated and are more in debt, the report said.

Large platforms such as the United States’ Affirm and Sweden’s Klarna have failed to break even since 2018 because of high operating costs and rising credit losses, according to the Bank for International Settlements study.

Klarna’s valuation, for example, has plunged from a peak of $45.6 billion in 2021 to a reported $14.6 billion. According to Crunchbase, Klarna has raised $4.5 billion from investors, including Abu Dhabi sovereign wealth fund Mubadala.

BNPL providers suffer higher delinquency rates than conventional consumer credit, said the Bank for International Settlements report. It notes that 18 percent of BNPL users in the US were in default compared with about 7 percent for non-BNPL users.

Tabby declined to comment when asked by AGBI about its customer default rates and whether the company had achieved breakeven.

A lack of public data makes comparing BNPL default rates across regions unfeasible, although it is possible to infer consumer behaviour trends from credit delinquency statistics. These indicate that Saudi consumers are significantly more diligent in meeting repayments than their counterparts in the US and Europe.

Credit card debt in Saudi Arabia reached a record SAR30.27 billion ($8.07 billion) in the third quarter of 2024, up from SAR26.49 billion in the prior-year period.

At the end of 2021, about 1.4 percent of Saudi banks’ credit card lending was non-performing, Argaam estimates.

By contrast, the annual charge-off rate for US banks’ credit card lending hit a 13-year high of 4.65 percent in the third quarter of 2024, according to the Fed.

The annual charge-off rate is the percentage of a bank’s remaining credit card balances that have proven uncollectible.

In Europe, this rate was 4.1 percent in the third quarter while the UK’s rate was 2.5 percent, according to a November survey by Fitch Ratings.

BNPL explained

In a BNPL transaction, a customer will buy a product or service from a merchant – an online or bricks-and-mortar retailer. The BNPL provider pays the merchant the amount in full and assumes the credit risk for the purchase.

The buyer will typically pay an initial instalment at the time of purchase and then the remainder over an agreed number of interest-free instalments. In return for taking on this risk, the merchant pays the BNPL provider a fee. Failure to meet the payment instalments incurs additional charges.