Buy now, pay later: The new debt trap?

It is the father of realism, Henrik Ibsen, who is quoted as saying: "Home life ceases to be free and beautiful as soon as it is founded on borrowing and debt."

Yet nothing is too expensive in today's tech-savvy world as long as you have a smartphone and some documented cash flow.

You may have cash, but the allure of Buy Now Pay Later (BNPL) is to some extent irresistible due to the method businesses sell this purchase method.

BNPL, popular as 'lipa pole pole' in Kiswahili, is a mode of purchase where a consumer is given an item on condition that they make certain payments monthly or weekly to clear the cost of the good.

If you fail, there are penalties that range from interests on the payments and the possibility of being negatively listed by a Credit Reference Bureau (CRB) or in some sophisticated way, through technology, you are blocked from using the item.

It is how it works with vendors who sell smartphones, one of the items in the markets on BNPL.

"Every day I am required to pay Sh50 daily to a pay bill number. If I fail, the phone somehow cannot connect to the network. So you have a gadget that cannot make calls, surf the internet but it has credit and the battery charge is full," said Enock Ameli, a beneficiary of the service.

While BNPL business has grown in other economies like Australia, probably to alarming levels prompting regulations, it is just but starting in the country.

Just this past week, two major providers of BNPL made key announcements. Lipa Later announced a partnership with Mastercard to push its BNPL business while Craft Silicon announced the entry of its new BNPL product, Spotit.

This overly excited BNPL market has already raised eyebrows of players in the country, even as financial institutions grapple to understand their role in this space; partly because this business is invading their (would be) turf, and that sooner or later, they need to find a way to either win this market back or leech in it, somehow.

Gen Z

"I am usually torn on where or how to place BNPL. Is it really a debt or a loan kind of a product or is it all about installment kind of payment?" posed Charles Kinyanjui, Head of New Ventures & Fintech Development at National Bank.

Mr Kinyajui notes that before this woke awareness of BNPL, the same transaction still used to happen but on local arrangements between a merchant and the customer.

It is a method that merchants use to accelerate or catalyse a movement of goods which caters for a subset of the population who cannot make full payments.

"If you look at banking, I mean we facilitate loans, that is our core business. Our BAU (Business As Usual) is not really into BNPL," said Mr Kinyajui.

He notes that BNPL product seems to have been embraced more by Gen Z, who also have an indifferent relationship with banks.

Steve Njenga, Chief Information Officer Digital Payments and Lending at Equity Bank points out the same challenge.

"When it comes to BNPL, banks have not really truly implemented it. We deal more with loans. Fintechs are really eating up that market," he said. "Banks are very risk averse so the unbanked we tend to cluster the unbanked as high risk."

But as banks still struggling to understand where they fit in the BNPL world, a lot of changes are happening in this space to take these products as close that same customer the bank either has or is targeting.

Spotit, the latest BNPL product in the country is embedded in the banking app. This means every time a customer opens their banking app, Spotit will be there, flashing the offers they have, making it even more irresistible for the customer.

"We will be going round working with all the banks in the country and requesting them, explaining to them how BNPL works and embedding it into their existing mobile app," said Craft Silicon Group chief executive Kamal Budhabhatti. "It just needs one line of code and if there is a cost to it, we will take it up."

Similar tagline

Craft Silicon, a software and technology solutions company, which is behind this new BNPL entrant, has already embedded Spotit in banking apps for Paramount Bank, DIB Bank, and NCBA Bank.

This new model of business is meant to counter other competitors like Lipa Later and Aspira's Lipa Baadaye BNPL products, which Mr Budhabhatti did not explicitly name, but referenced saying 'they ask for so much documentation when one wants to purchase an item'.

In fact, that is why he wants Spotit to be known as Get Now Pay Later and not Buy Now Pay Later.

"This process is too long. I have done it myself," he said.

Embedding Spotit in banking apps ensures consumers' credit score is in check as it is cross-referenced with that both the bank and CRB.

Interestingly, both Lipa Later and Spotit have almost similar tag line. Spotit goes by the tagline 'upgrade your lifestyle' while Lipa Later uses 'upgrade your life'.

Yet this allure of a better lifestyle runs the risk of having consumers drown further into debt.

Isaiah Opiyo, Product Manager TransUnion, which is one of the CRBs in the country, states that this is one of the key issues in BNPL products. He says there is a risk that BNPL could be extended to someone who is already over-indebted in their pursuit of a celebrity lifestyle.

"That is exactly what most digital lenders face today," he said.

He recalled that when digital lending was the then quail in the financial sector space, the majority of the service providers were not willing to share data with CRBs. This led to many Kenyans being negatively listed with CRB when finally, regulations caught up with the service providers.

While he supports BNPL as a base to build good credit scores, Mr Opiyo says it is important BNPL providers share this data to avoid history repeating itself.

Aspira Chief Operating Officer Irshad Muttur while detailing the checks and balances on debt put in place when offering this service, said his firm also offers incentives to those who pay on time.

"In our operations, we do risk-based pricing and this is in line with regulators. In this, if someone has a lower risk profile, they tend to get a lower rate of interest," he told The Standard. "Also, we give interest rate rebates for repeat customers."

But the narrative that BNPL could contribute to celebrity lifestyle may not be true if customers like Timothy Nandokha are considered.

He is quite established in his career as an interior architect having worked with notable brands which ideally means, he can walk into any shop and buy what he wants, in cash.

Cash flow

But at times he has opted for BNPL.

"Yes, I could walk to let's say Hotpoint and buy in cash but I say if I do, will I be able to meet other payments in the week?" he self-agonised.

He says in his line of work; cash flow is very important because he deals with workmen who sometimes would not buy any narrative that their pay is not ready. He registers his experience with BNPL as 50/50.

"The main reason we go for BNPL is not specifically because of debt. It is all about cash flow management," he said.

Wachira Wanini, Head of BNPL Product at Craft Silicon points out that it is only over the last seven years that people started talking about BNPL products.

"I know initially consumers were like -what is that?" she said. And now the product seems to be taking shape in the country.

Hotpoint Appliances is one of the merchants who has embraced BNPL working with different providers including Lipa Later. Keval Kanani, one of the directors, said when they started BNPL, it only accounted for 0.5 to 0.75 per cent of their retail turnover.

"Today we are looking at five to six per cent. The potential is huge," he said.

He compared Kenya to other markets, giving an example of Mauritius, where BNPL has grown.

"The data we get is that up to 50 per cent of (retail) revenue is from BNPL. We are literally just scratching the surface at the moment in Kenya," he said.

But if this space is to grow, one of the things that BNPL providers should look at is the interest rates and the too much documentation to get approval for financing.

"Some of the rates could be pretty punitive, similar to how the Finance Act (2023) is," he cunningly said.