Buy Now, Pay Later in Africa: Will Carbon & Shahry Lead the Way?

The Rise of Buy Now, Pay Later (BNPL) Services

Affirm, Afterpay, Klarna, and Quadpay represent some of the leading global companies driving the buy now, pay later (BNPL) trend. These platforms enable customers to acquire goods online and settle payments through installments, often with minimal or no associated fees.

Their increasing prominence is directly linked to the accelerated growth of the e-commerce sector worldwide, a trend significantly boosted by the recent pandemic.

Addressing the Shortcomings of Traditional Credit

For a considerable period, credit card companies have occupied this financial space. However, a key drawback of credit cards lies in their reliance on substantial fees, frequently leading individuals into long-term debt.

The pandemic resulted in widespread job losses, prompting millennials and Generation Z – a demographic possessing over $200 billion in spending capacity – to learn valuable lessons regarding debt management. Consequently, many have become averse to debt and are actively seeking more favorable financing alternatives.

Consumer Motivations for Utilizing BNPL

A 2020 survey conducted by Motley Fool, encompassing over 1,800 participants, investigated the reasons behind U.S. consumers’ adoption of BNPL services.

The results indicated that 39% of respondents chose BNPL to circumvent credit card interest charges. Furthermore, 16.3% expressed a preference against using credit cards, while 14% reported that their existing credit cards had reached their spending limits.

A Shift in Financial Preferences

For millennials, the advantages of credit card ownership are diminishing. There's a growing inclination towards purchasing products on credit directly at the point of sale.

Global consumer spending utilizing online point-of-sale (POS) finance or BNPL through e-commerce channels is projected to reach $680 billion by 2025.

BNPL Adoption in Africa

While established BNPL providers boast extensive merchant networks and large user bases, the adoption of these services is still in its early stages within Africa.

In a region where debit cards are far more common than credit cards, emerging BNPL players are primarily lending companies.

Leveraging Technology for Credit Risk Assessment

These companies are utilizing technology to effectively evaluate their customers’ creditworthiness. By gathering data through partnerships with merchants, they analyze consumer shopping behaviors and purchasing power to fuel their BNPL initiatives.

Evaluating Credit Risk by Digital Platforms

Recently, Carbon, a Nigerian digital bank, unveiled Carbon Zero. This innovative product enables customers to acquire electronics and gadgets through manageable installments, offered at a 0% interest rate. A partial upfront payment of the total cost is required before a purchase is finalized. Subsequent payments are then structured over a six-month period.

The limited availability of such services across the continent stems from several factors. Notably, the credit infrastructure within many African nations is still developing, and a significant portion of the population possesses constrained purchasing capabilities. Therefore, the question arises: how does Carbon intend to evaluate potential risks associated with this new offering?

Established in 2012 as a digital lending service, Carbon has expanded its operations to become a prominent digital bank in Nigeria. It now provides a diverse range of financial services to over 659,000 customers. Having accumulated substantial experience and a proven history of loan disbursement – reaching $63 million in 2020 – Carbon is well-positioned to enter the buy now, pay later (BNPL) market with Carbon Zero.

According to Chijioke Dozie, the company’s CEO, a strong lending background is crucial for success in this space. He stated to TechCrunch, “A company lacking a lending track record would struggle to offer a comparable service without substantial capital reserves.” Carbon’s decade of lending experience in Nigeria has generated a wealth of customer credit data, enabling effective risk assessment for both existing and new customers.

Carbon Zero aims to fulfill the company’s long-standing commitment to integrate financial services into customers’ daily purchasing habits. However, access to this service is currently limited to individuals earning a minimum of ₦200,000 ($500) per month, representing a relatively small segment of the population.

The journey to identifying a market need and achieving product-market fit unfolded differently for Shahry, an Egyptian digital lending platform. In 2019, co-founders Sherif ElRakabawy and Mohamed Ewis, while managing Yaoota – Egypt’s leading shopping engine and price comparison site – observed frequent user requests for installment payment options. This demand coincided with a period of Egyptian pound devaluation and subsequent inflation.

Responding to this market opportunity, the founders launched Shahry, targeting the underbanked youth demographic with installment payment solutions. This positioned them in direct competition with traditional banks offering similar services, primarily through credit cards.

ElRakabawy, the CEO of Shahry, explained to TechCrunch, “Currently, we are the sole buy now, pay later application in Egypt providing a completely online experience, eliminating any physical processes or paperwork from account creation to product delivery.”

Unlike Carbon Zero, Shahry’s model doesn’t necessitate a down payment. Instead, users apply for virtual credit via the mobile app, which is then used for purchases from Souq, a major Arab e-commerce platform. Creditworthiness is determined through algorithmic analysis and a credit risk assessment based on customer data. The company is also actively developing an AI-driven model to facilitate fully automated, instantaneous credit decisions.

Strategic Alliances and Capital Acquisition for Competitive Advantage

The implementation of Buy Now, Pay Later (BNPL) solutions demonstrably assists merchants across various sectors in boosting sales figures, enhancing conversion rates, and achieving notable increases in average transaction values.

Shahry generates revenue through the collection of interest and commission charges from its merchant partners, mirroring the financial model employed by Carbon Zero. Currently, Shahry collaborates with Amazon through the Souq platform, and ElRakabawy indicates plans to integrate hundreds of additional retail businesses, both physical and online, throughout the remainder of the year.

Carbon Zero initially partnered with leading distributors of genuine electronics and gadgets within Nigeria. Despite these merchants offering competing products, Dozie emphasizes that Carbon Zero does not intervene in pricing strategies. The company’s focus remains solely on providing financing for products, leaving aspects such as pricing, fulfillment, and logistics to be managed directly between the merchant and the consumer.

“Merchants have been informed that offering competitive pricing is in their own best interest, as we will maintain impartiality and not prioritize any single merchant. Customers retain the freedom to select their preferred Carbon Zero merchant, and their purchasing decisions will ultimately reflect their choices,” he explained.

Successfully launching a BNPL service necessitates a robust credit infrastructure and substantial financial resources. This explains the significant capital raised by industry leaders such as Affirm and Klarna, measured in billions of dollars, and Afterpay, in the millions. While Shahry and Carbon Zero currently operate with more modest funding levels, they are adapting to the typical resource constraints faced by African startups – for example, Shahry reports experiencing significant month-on-month growth despite securing only $650,000 in pre-seed funding last year.

However, ElRakabawy acknowledges that providing financing for these transactions has created financial pressures for the company, even though its potential within the Egyptian market remains largely untapped.

“The market presents a considerable opportunity and remains largely unserved,” he stated. “Demand currently exceeds our capacity to disburse loan capital.” To address this, the company intends to secure a second round of funding from both new and existing investors in the coming months.

Carbon Zero is also likely to pursue additional funding as it prepares for a Series B investment round in the near future. However, Dozie’s primary concern is adapting the globally successful BNPL model to the unique challenges of the Nigerian market.

“We recognize substantial potential for Carbon Zero within Nigeria. A direct replication of strategies employed by BNPL companies like Affirm or Klarna is not feasible, given their operation within established retail landscapes. Carbon Zero will not only modify its approach to deliver a seamless payment experience within the retail sector but will also extend its services to other areas where payment flexibility is needed – including travel, education, and healthcare.”