Global Themes /

Buy Now Pay Later to revolutionise consumer credit in emerging markets

  • Consumer credit in emerging markets is significantly underpenetrated, but BNPL firms are well-placed to change this

  • Global giants expanding to EM, cross-border BNPL and payments-BNPL partnerships are some of the key trends to watch for

  • Excessive debt burdens leading to higher default rates is a key risk; we expect stricter regulations for the sector

Buy Now Pay Later to revolutionise consumer credit in emerging markets
Rohit Kumar
Rohit Kumar

Global Financials/Thematics

Tellimer Research
22 November 2021
Published byTellimer Research

The penetration of consumer credit in emerging markets is far lower than in developed markets, but this is set to change with the emergence of innovative Buy Now Pay Later (BNPL) fintechs. There has been a strong shift towards e-commerce and digital payments in recent years, both of which are helping BNPLs thrive. The growth of these firms will power a surge in consumer spending and e-commerce in emerging markets.

We expect to see more interest from global BNPL giants in the emerging markets and partnerships between payments and BNPL companies are likely to continue. Offline/in-store and cross-border segments of BNPL are likely to get traction. And we also expect more IPOs in the sector along, and the emergence of new unicorns.

A note of caution: there are risks associated with the BNPL business model. Default rates could increase as the BNPL trend leads to aggressive spending behaviour and excessive debt burdens. Also, regulatory oversight could increase with the goal of creating a balanced ecosystem, supporting growth and managing risk at the same time.

Formal credit penetration lags in EM, an opportunity for BNPL firms

Traditional forms of consumer credit (including credit cards) have not been as successful in emerging markets as in developed markets. The reasons for this include the low coverage of credit bureaus, government borrowing crowding out private sector, the unwillingness of banks to cater to low-income individuals and high interest rates.

BNPL firms in EM are well-positioned to capitalise on this opportunity as the increasing adoption of digital payments provides them with much-needed access to consumer spending data and the cost to consumers is low or zero in most cases, making it a lucrative product.

Formal credit penetration – Emerging versus Developed Markets

Key trends to watch in BNPL

The popularity of BNPL will increase even further in emerging markets. We expect the following trends:

Global BNPL giants to take more interest in emerging markets. Global companies have so far focused on strengthening their positions in their core markets. But, after achieving scale and financial muscle, we expect them to look to tap emerging markets. We think partnerships with EM firms or acquisitions of domestic market leaders are more likely strategies than in-house expansions.

Cross-border BNPL to gain more traction. ZoodPay is a leader in this area in Central Asia and Middle East while Klarna also offers cross-border BNPL solutions in its markets. We think there is strong scope for this segment to grow as global cross-border business-to-consumer e-commerce is expected to grow strongly, at c30% CAGR in 2020-27, according to Zion Market Research.

Offline BNPL has huge scope. E-commerce penetration is low in some markets, but this needn’t be an insurmountable hurdle for BNPL firms. Offline/in-store BNPL is likely to be a key focus area for the sector.

Payments-BNPL partnerships to continue. We have seen a few high-profile acquisitions and partnerships between global payments giants and BNPL companies, such as like Square-Afterpay, Paypal-Paidy and Stripe-Klarna. We think payments companies and BNPL firms are a natural fit as they cater to the same group of merchants and consumers. We expect this trend to continue.

More IPOs in the BNPL sector. Affirm and Splitit have already listed in 2021, and Klarna is also planning to list. In emerging markets, Kredivo has announced a plan to list via a SPAC merger. And there could be more announcements in 2022 as companies achieve scale and look for big-ticket fund-raising options.

More BNPL unicorns could emerge. Currently, there are only two unicorns in the pure-play BNPL sector in emerging markets: Akulaku (Indonesia) and Atome (Singapore). But we think more could emerge, particularly in large and tech-savvy markets, such as India.  

Risks associated with the BNPL boom

BNPL provides significant convenience for consumers, but we see four key risks associated with the business model:

  1. Excessive debt burdens. BNPL could trigger spending behaviour that is more aggressive than with credit cards. This could lead to unsustainable levels of debt for consumers.

  2. Consumers may not fully understand the product. BNPL, in many cases, is free for users if they pay their debts on time, but there are repercussions for late payments that consumers might not fully understand.

  3. BNPL is even riskier in emerging markets. Income levels are low, data availability is weak and wilful defaults can be high as some consumers might not care about protecting their credit histories.

  4. Regulatory environment could become stricter. Excessive use of BNPL could increase systemic credit risk, so we think regulators might step in to implement stricter risk management rules, including credit limits, capital requirements and prudent loan provisioning. 

5 BNPL companies in EM to watch

Below, we highlight five emerging market BNPL companies to look out for in 2022:

  1. Akulaku (Southeast Asia). Akulaku, founded in 2016, is operating in four countries in Southeast Asia: Indonesia, the Philippines, Vietnam and Malaysia. BNPL is Akulaku’s flagship product. Akulaku had 6mn users in July 2020, with an annual transaction value at that time of US$1.5bn.

  2. Kredivo (Indonesia). Kredivo, founded in 2015, is a leading Indonesian BNPL company. It has c4mn customers, with an annual transaction value of over US$1bn.

  3. Tabby (UAE). Tabby, founded in 2019, has become one of the leading BNPL providers in Saudi Arabia and the UAE within a very short period of time. It has 400,000 active users and 2,000 merchant partners.

  4. ZestMoney (India). ZestMoney was established in 2015 and is one of India's largest and fastest-growing BNPL companies. ZestMoney serves 6mn consumers through its partner network of 3,000+ online and 15,000+ offline merchants.

  5. ZoodPay (Central Asia and the Middle East). ZoodPay is a leading BNPL provider in Central Asia and the Middle East with its own demand-generating marketplace, ZoodMall. It has more than 7mn app users in five countries, offering 6mn+ products from over 30,000 merchants.