The momentum realised in the buy now, pay later (BNPL) e-commerce space has also carried over to brick-and-mortar sales. The shifting monetisation strategies are largely seen as a way to ensure sustainability as cash burn continues to rein in the growth of the sector.

Hosam Arab, CEO and co-founder of Tabby, says that brick-and-mortar retail is a key area of focus for his startup and a "natural extension” of its offerings.

“I think [Mena is] still largely an offline retail market. It is an area that we've been focused on for a while right now, and we ensure that our customers are able to use us across platforms and channels rather than just within a single online channel. The opportunity is quite significant, it’s close to 90 per cent of retail happening offline and that's the area where we see a lot of potential growth going forward," he explains.

The vast market opportunity in offline retail has driven the rise of startups looking solely to serve offline merchants. This includes Madfu, a Saudi Arabia-based BNPL focused on businesses in the entertainment industry, positioning itself as an “enjoy now pay later” company.

“The plenitude of BNPL solutions in the market has sparked the demand for them in the offline space as well,” says Anas Alshuqayr, co-founder of Madfu.

Credit cards

The company primarily targets consumers who do not have credit cards, a segment widely underserved according to Alshuqayr.

“Only 30 per cent of Saudi adults have credit cards. The population aged 18-29 doesn’t usually have a credit history. We help [them] purchase goods with flexible instalments, which is also in tune with the overall financial inclusion strategy,” he says.

The same strategy is being applied by some of the BNPL players in Egypt. According to Amr Sultan, CEO and co-founder of point of sale financing solution Blnk, only 9.5 per cent of the country’s adult population has a credit history.

“The market is underpenetrated, and the demand for affordability is quite significant, which translates to longer tenures (extended payment schedules), with interest fees, but this should be proportional to the consumer’s disposable income,” says Sultan.

With spending going down as a result of rising inflation and the recent devaluation of the Egyptian pound, banks are working to cushion the impact of the economic crisis by offering flexible payment schemes for customers. From there, banks are increasingly looking to offer BNPL options on a variety of purchases for their credit card holders, which represents a challenge to existing providers. 

Additionally, banks can offer interest-free payment schemes, something that BNPLs in Egypt cannot offer because of the rising interest rates in the country. That is the likely the main reason why Tabby exited the market only a few months after its launch since it attempted to provide a standard zero-interest, zero-fee BNPL product. As interest rates rise, BNPL companies end up charging merchants higher repeat costs to cover their operating expenses, which makes this specific model more challenging to manage in a high-interest environment. 

According to Mastercard’s New Payment Index report, there is “high consumer awareness of BNPL instalments as a budgeting tool”. The report found that 81 per cent of Egyptians are familiar with the concept, and half of them are comfortable using it.

Across different markets of Mena, the competitiveness of the sector marked by the strong presence of banks and other non-banking financial institutions (NBFIs) in the BNPL space poses a barrier to growth for existing providers. However, the biggest concern is that building a BNPL from scratch is a time-consuming and costly process, and it takes a long time to onboard and integrate merchants. 

Regulations

The BNPL sector remains largely unregulated across Mena. But the Central Bank of Saudi Arabia (SAMA), recently issued a BNPL permit for providers that do not charge fees or interest to customers. SAMA has also published a set of BNPL-focused regulatory frameworks up for public consultation, with the primary goal of these regulations being to deter any form of irresponsible spending and safeguard consumers from racking up unnecessary debt by putting a cap on the amount that users can spend with BNPL providers.

With a regulatory framework in place, the value of the BNPL as a product becomes further entrenched, with incumbents and NFBIs expected to leverage that and start offering BNPLs within their ecosystems as well. As a result, investor confidence in the market will likely hold up; however, concerns linger as to how far regulations might impact the fundraising prospects of BNPLs.

“One of the biggest uncertainties globally has been around the lack of regulation in the sense that it gives all of us a lot more certainty around where the space is headed but also ensures that any BNPL player that is coming to the market is doing things right. A lot of that uncertainty has been addressed, at least, and that gives investors comfort,” says Arab.

Alshuqayr on the other hand believes the presence of rigid regulations might be a source of worry for BNPLs since “more regulations spawn further challenges, including higher costs”. He further argues that putting more flexible and ‘lighter’ regulations in place to tentatively assess the impact of the regulatory changes on the sector is better suited for the agile nature of BNPL startups. 

Overall, a clear, comprehensive, and well-defined set of regulatory frameworks will help foster a conducive environment for players to operate but could also place an operational burden on players in the broader consumer credit space, which might impact their potential to scale.

BNPLs have enjoyed "regulatory leeway", which has enabled them to achieve scalability more quickly compared to other fintechs in the lending space. Given the fact that the monetisation comes directly from merchants, not the customers, they are not framed as lenders. All in all, the growth demonstrated by the early movers and dominant players in the BNPL market has already set industry standards and customer expectations around their products, strengthened by their popularity and strong brand positioning. This in several markets prompted the regulators to closely monitor their performance before licensing other players.

BNPL companies that have obtained permits from SAMA so far are Spotii, Tamara, Tabby, Madfu, and Al-Tamayoz by AlMoaamar Information Solutions (MIS).