The South African consumer credit market is receiving a much-needed shakeup with the entry of new payment and credit options at online and brick-and-mortar stores.

Fintech and payment companies are introducing South African shoppers to innovative and accessible new financing options that make it easier to purchase items in a cash flow-friendly manner.

For retailers, the promise of greater customer retention and increased sales is encouraging adoption of new payment innovation, with fintech companies playing a vital integration role to ensure new payment options can be seamlessly added to in-store and online purchasing experiences.

Buy-now-pay-later, purpose-based lending, and layby are empowering consumers with greater purchasing choice, especially where traditional credit is inaccessible.

SA market hungry for credit

In light of the pressures of the pandemic on household cash flow, South Africans are hungry for credit.

Recent data indicates that nearly a third (31%) of consumers intend to apply for new credit or refinance existing debt in the next year. Personal loans (43%) and credit cards (35%) are the most favoured types of credit among these consumers.

However, lenders are tightening their policies to minimise the risk of defaults. Origination of new credit accounts has dropped by 42.7% year-on-year in Q1 2021.

This poses challenges for cash-strapped consumers and retailers hungry to make up ground lost to the pandemic and other disruptors, such as Eskom and the July unrest.

Even ignoring this year’s pressures, most people simply can’t afford to purchase many of their essential items without some form of credit. Just consider the cost of a smartphone, or a car, or large household appliances: big-ticket items typically require some form of lender support.

Expanding options for point-of-sale financing

So if credit is inaccessible, what options do consumers have?

Buy-now-pay-later, an interest-free payment option that usually involves 3-4 instalments and is offered at the point of sale, has arrived with much fanfare in South Africa. After emerging as a popular payment option in Europe and North America, especially among younger shoppers, several buy-now-pay-later (BNPL) lenders have entered a local market hungry for new credit options.

In the US, where BNPL has gained huge traction, 39.4% of consumers in a recent survey said they use BNPL to avoid paying credit card interest, while nearly a quarter stated they do so to get credit without the checks that go into traditional credit applications.

In South Africa, credit provision is closely regulated by the National Credit Regulator. At the moment, BNPL falls outside the ambit of the National Credit Act, as there is no interest charged to the consumer. Regulators in more developed markets have already called for a review of policy to address perceived risks of BNPL, and it is likely that SA will follow suit.

Another emerging in-store credit type is purpose-based lending (PBL), which provides shoppers with a marketplace of potential lenders. After submitting a loan application for a specific product or basket of products online or in-store, shoppers receive the best available loan offer, enabled by a platform-provider (such as Switch Pay) that is integrated to the point of sale.

A McKinsey study found that 60% of US consumers said they are likely to use point-of-sale financing, such as BNPL and PBL, in the next year.

Layby, where shoppers make regular payments toward the purchase price of a specific product – through debit orders, cash deposits at ATMs and other payment options – is an alternative for those that don’t want to go into credit to make their purchase, or simply don’t qualify for credit.

A win-win for shoppers & retailers?

But do these new payment options live up to the hype? And do they offer greater value to shoppers and retailers alike compared to credit cards?

For consumers that lack access to credit cards, having new options for financing purchases is a welcome benefit. Eighty percent of South Africans hold a bank account, but there are only 6.7 million active credit card accounts. For the rest, credit applications can be difficult, especially as lenders tighten their policies to remain within the regulations of the National Credit Act.

Comparison of BNPL, credit card & purpose-based lending costs/fees

Credit Type Monthly Fee (consumer) Transaction Fee Merchant Interest (consumer) Ad hoc Fees
Buy-Now-Pay-Later R0 4.5% – 6% of transaction value 0% High penalties to consumer for late repayments
Credit Card R0-R500 <2.5% of transaction value 0% for first 55 days. 7% – 20.5% thereafter
Purpose-Based Lending R0 2% of transaction value Depends on credit product

Buy-now-pay-later may be more accessible, but it does not always offer a better alternative to credit cards, as it requires 30-50% upfront payment. And while BNPL offers interest-free payments to the consumer, the same benefit is available to credit card holders that can pay off their purchase within the standard 55-day period.

Credit cards, however, also charge monthly service fees that can range between R30 and R500 depending on the type of card, while BNPL and PBL charges no monthly fee to consumers.

For retailers, the cost-benefit analysis is far more fraught. BNPL providers, for example, charge retailers a percentage of the sale – normally around 4.5% to 6% – as well as a transaction fee. The provider then manages the payment plans, and typically pay the full amount over to the retailer within days, minus the abovementioned fees.

In return, retailers can enjoy a 20-30% increase in retail conversion rate and 30-50% increase in basket size.

The big question for retailers will be whether new payment options are suitable for their specific customer bases, and whether those payment options are appropriate for the type of products they sell.

What is certain is that consumers – supported by a growing ecosystem of fintech and payment innovators – are driving changes that could reshape South Africa’s credit market and make financing accessible for more people than ever before.

And that can only be a good thing, right?