Tabby, a leading Buy Now Pay Later (BNPL) provider in Saudi Arabia and UAE, yesterday raised US$54mn in an extension of its Series B funding round; it had already raised US$50mn in August 2021 at a valuation of US$300mn. The company is growing strongly, with transaction volumes up 8x since August 2021 and 50x in full year 2021. Its active userbase has risen to 1.1mn compared to 0.4mn in August 2021. Note that Tabby was one of the five attractive BNPL companies we highlighted last year.
Tabby’s rapid growth reaffirms our view on the massive potential of BNPL in emerging markets. 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 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.
Tabby – Company profile
Tabby, founded in 2019, has in a short span of time become one of the leading BNPL providers in Saudi Arabia and the UAE. It has 1.1mn active users and 3,000 merchant partners. Tabby allows customers to pay for their purchases in four interest-free payments, billed monthly. The company generates revenues from merchants on its platforms, and through late payment fees. Tabby has so far raised US$185mn in debt and equity, and it was valued at US$300mn in August 2021. The company’s transaction volumes are growing strongly; up 8x since August 2021 and 50x in full year 2021.
The consumer response to Tabby’s BNPL product is very encouraging. According to the company, Tabby’s new partner merchants see 20% of customers checking out using BNPL which over time grows to 30-40%. Tabby wants to expand its geographic footprint in MENA, with Egypt being the next country on its radar. Investors in the company include Sequoia Capital India, STV, Arbor Ventures, Mubadala Investment Capital and Global Founders Capital (GFC).
Tabby’s BNPL consumer interface
The BNPL opportunity in emerging markets
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 and credit reference agencies, government borrowing crowding out the 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. BNPL firms could also help to grow the pie for digital payments and e-commerce in these countries: flexible repayment options can attract customers who might previously have avoided or delayed their purchases.
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 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:
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.
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.
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.
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.