Pressure on consumers evident as interest-free buy-now-pay-later shopping surges

Buy-now-pay-later (BNPL) services have gained n popularity in South Africa over the past few years, offering consumers a simple and convenient way to purchase goods and services online without having to pay the full amount upfront. This service has been particularly appealing to cash-strapped South Africans.

The trend began to appear just before Covid and has grown exponentially in the years since.

Lay-bye schemes have of course been around for decades, but today’s BNPL concept flips the sequence: rather than taking it home only after they’ve paid in full, consumers using these modern payment methods can acquire an item for just a small deposit and a perfunctory credit check. This global phenomenon has infiltrated nearly every corner of e-commerce, allowing consumers to buy products in categories such as apparel, consumer electronics and appliances, travel and home décor. This trend in spending is concerning when the amount of credit per consumer is not reduced, but instead increased as credit card and other more expensive credit lines are now used to fund essential spending such as groceries and monthly bills.

The latest quarterly TransUnion report reflects that two out of every three South African households have reduced their regular spending habits, and one of three admit to not being able to pay their monthly bills and loan instalments in full.

Only 36% of households indicate they have been able to increase their income year-on-year of which 19% indicated it was due to starting new ventures rather than direct employment wage increases. Just less than a quarter of respondents reported a decrease in household income due either to job loss or wage cuts.

In total, 92% of respondents said access to credit was “absolutely essential” to their economic survival, and yet half who had access to such credit were unable to utilise the facility because rising interest rates had made it unaffordable. This real reduction in disposable income reflects how much the economy is struggling.

This explains the strong growth in the BNPL model as it does not charge interest and is easily accessible compared to a credit card. To a new generation of borrowers, zero interest implies free money and the idea of paying off daily indulgences doesn’t faze many younger consumers. However, in the case of uneducated consumers this trend should be sounding alarm bells given the practice is not regulated under the National Credit Act and consequently opens the consumer to potential over-indebtedness should they use the lending model for inappropriate purchases and later find themselves hit with extremely high-interest rates and penalties. This can lead to a debt cycle where consumers are constantly trying to pay off past purchases while accumulating new ones.

Trade Intelligence South Africa reported that real retail trade sales (i.e. growth at constant prices) has grown only 2% year-on-year. Financial distress among consumers is a worldwide phenomenon: Mastercard did an international survey in which 25% of respondents said they had used the BNPL model and a further 25% said they were open to doing so.

The fear for South Africa is that the immediacy of online shopping combined with the similar immediacy of the BNPL model, which is at the same time unregulated, can lead to future overspending and financial mismanagement. Consequently, retailers need to be questioning whether this is a sustainable model for them and their consumers, and what might come down the line both from consumer resentment and from regulators.

With real GDP growth forecast this year at just 0.3% this position is likely to worsen before it improves. Furthermore, inflationary pressures remain along with rising interest rates. South Africa has a unique economic landscape that makes sustainability of the BNPL trend cause for concern. The World Bank reported South Africa to be the most unequal country in the world where 10% of the population owns more than 80% of the wealth, along with ongoing issues of corruption.

Much of what drives the local retail sector has its origin – and pricing – abroad in the major markets of the US, Europe and China. These trends impact the different retail sectors in different ways, and retailers need accurate data on their sustainability across all sectors and how broad trends affect their individual sector.

Despite the potential for financial and environmental harm, there is no doubt that BNPL is a powerful tool for achieving growth, especially in times of economic uncertainty. However, for such arrangements to be sustainable, South Africa will need to put measures in place that prevent the exploitation of the poorest of its citizens while also promoting sustainable trade and commerce practices.

With the growing popularity of BNPL, the importance of data analytics cannot be overlooked. Data analysis provides insights into consumer behaviour, helping retailers to improve product designs, prices and promotional activities. Data analysis can assist BNPL providers to personalise their marketing efforts and offer customised rewards and incentives that match consumer needs and preferences. There are various data analytics tools that can identify fraudulent patterns, transactions, and behaviours in real-time, assisting retailers in fraud detection and prevention. Furthermore, data analysis is able to assist retailers to optimise operations and improve customer satisfaction through monitoring of customer feedback, identifying delays and bottlenecks.

Danielle Keeve is audit partner and national sector leader for Retail at Mazars in South Africa.