Think of Buy Now, Pay Later (BNPL) services and it’s easy to pigeonhole them as a means to instant gratification; purchases like shoes and clothes, say.
And some people do – “but that’s not the narrative that should build the perception,” says Mark McChlery, Co-founder of PayJustNow. In fact, BNPL is becoming the bedrock of many fintech companies in the credit sphere.
PayJustNow forms a part of the Weaver Fintech ecosystem, after being bought out by the listed company in 2022. The business model functions like this: customers pay for a third of their total fee upfront and pay back the remaining portions in two instalments. The company has over 4-million customers, mostly because this Pay-in-3 service is both fee and interest free.
“Our actual core business model is we charge the merchant a fee to process the transaction,” explains McChlery. That makes it a virtually unprofitable business; but that’s not the point. The point is the four million people the company has attracted, credit assessed and processed the data of.
The goal, explains Weaver Fintech CEO Sean Wibberley, is to onboard customers via the basically-free BNPL service, at which point “they build up a data profile with us and then they get exposure to the other products in our data system, chiefly our lending products and insurance products.”
Weaver Fintech’s other subsidiary is the digital loan provider, Finchoice. The company provides fast, low-cost loans to customers, many of which are first-time credit users, Wibberley explains, but are “existing BNPL customers.”
“If we’re able to identify who the good [BNPL] customers are, Finchoice is able to benefit from that by offering products to customers when they need it based on the data,” says Colin Campbell, chief marketing officer at Weaver Fintech.
“The reality is BNPL is not a very profitable business…but if you’re able to make money from lending, you’re able to give more people BNPL”, he says, which in turn brings on new customers for lending. The ecosystem sustains itself.
Where are the banks?
While traditional lenders make their money off the actual credit being loaned, fintechs like Weaver are engineering a money-making base out of having a good customer relationship.
Why then, haven’t banks jumped on this wave? “My view is that there’s a lot of organisational lethargy,” says Thomas Brenna, CEO of the fintech app, Franc. He puts it down to traditionalism.
Even “new kids on the block” like Discovery bank, who are themselves a fully digital fintech bank, are “bringing in people that are hired by the industry … and therefore the way they think about credit is very traditional,” he continues.
On top of that, regulatory bodies such as the South African Credit and Risk Reporting Association (SACRRA) are not very motivated to go about changing the rulebook or make space for new types of credit.
“Although they have a mandate to define these new things, they don’t want to do it, because it would mean changing all the data systems of the banks and the banks are reluctant to do so,” says Brennan.
“I think the cultural element is a huge part of it,” agrees Sarah-Jane Alexander, an investment analyst at Coronation.
In the meantime, new players are experimenting with using different, less conventional credit regulation and measuring methods to open the market up.
The economics of ecosystems
There are a wealth of benefits to this fintech-style of credit lending besides just the ability to cross-sell products to customers.
While traditional lenders have to spend millions and bring in third-party companies to engineer campaigns to acquire new customers, Weaver Fintech’s cost of acquisition is supremely low, averaging around R9 per customer. For banks and insurance companies, this can be in the hundreds of rands per client.
“If you’ve got an ecosystem like we do, and [customers] are regularly coming onto our site, when they see our funeral plan offer and take it up, the cost of acquisition is very low for us,” says Wibberley.
Another cost which runs up the bill for banks and insurers is the cost of collecting the premium. But for Weaver Fintech, “the cost of collections can be bundled with the cost of collecting that person’s loan,” explains Wibberley.
Having subsidiary businesses that do very similar things, fintechs can mitigate their costs by sharing information. “You don’t have to incur the same cost for the same customer twice,” says Campbell. Additionally, being able to reduce two components of cost means they can reduce the premium amount to the customer, making the actual product cheaper itself.
Low and grow
One of the most expensive and laborious aspects of credit provision is, unfortunately, the most important part: the risk analysis. Running credit checks and adjusting for risk is the tough part of the business for traditional lenders, but fintechs are making it a smoother and cheaper task.
Again, this usually all starts with BNPL: customers are onboarded via a fairly simple process, including a simple credit bureau check. But “because there’s no fees or interest, one is not required to conduct a paper-based affordability,” says Wibberley.
“97% of our lending is digital. So, we don’t really need to get people involved in it,” Campbell says. It is a far less rigorous process, and one that does not require the complex credit score process needed by institutional lenders.
Indeed, BNPL is not regulated as a credit product at all. Rather, the company evaluates its customers on the basis of the data they report back from their first few BNPL repayments.
While this might be cost-effective, analysts also note it can be problematic. “From a compliance perspective, the costs are much lower because they don’t have to comply,” Brennan says. “I do think they have gotten away with a little bit of murder here, because it is an unregulated product,” he says.
“There’s definitely a risk that a consumer can become more indebted if they’re not aware of how much debt they’re taken on,” agrees Alexander.
Detractors say that a lack of regulation leads to a higher proportion of thin-file credit consumers; clients which most traditional lenders would dismiss as ‘subprime’. McChlery argues against this.
“The reality is, you wouldn’t be able to initiate that transaction anyway because the first instalment is due at checkout,” explains McChlery. “So, we kind of hedge our bets on that low and grow approach; the first dance, so to speak.”
“The concept of subprime is to milk fees and interest out of unperforming debtors,” he continues. “Conversely, we have no fees or interests we can milk.”
Overstating the risks
While 19.7% of PayJustNow’s customer base are underserved customers with limited credit histories, “it doesn’t mean that they are risky. It just means that they are unmeasured,” Campbell continues. He notes that the company reports just under 2% in default.
Brennan agrees that the risk factor is largely a misconception. “A good chunk of [PayJustNow] clients actually have credit cards. So, I don’t know if I would agree that all of the clients are high risk. Obviously, having a credit card doesn’t mean you use it wisely, but the banks are much more conservative in terms of who they give credit cards to.”
Based on their ability to repay their simple BNPL instalments, customers are offered larger loans through Finchoice. Their average loan size sits at around R4,000, which may grows depending on the repayment data available on the customer.
While PayJustNow might not be a competitor to the traditional credit providers, Finchoice definitely is, says Campbell. “We’re all there to provide customers with access to finance,” he says, but what sets their business apart is the sheer amount of data available to them on their clients’ behaviour.
“Giving money to customers is quite easy but understanding which customer needs which product and when is where the secret sauce is.”
(Another) MVNO
And then there are value-added services (VAS): airtime, data, and electricity on credit, all usually through a mobile app. It is a simple but highly lucrative style of credit provision – whether from an internet service provider, a bank or even a grocery chain.
“Retailers are becoming banks, banks are becoming ISPs, ISPs are becoming retailers,” says McChlery. And Weaver Fintech is eager to get in on the business.
“In Q3 we are going to be launching a Mobile Virtual Network Operator (MVNO) called PJN Mobile,” Wibberley tells Currency. It will be connected to its namesake, the PayJustNow service. “We want to use it not necessarily to drive a new revenue vertical for us, but to have it as a reward for using our ecosystem and our products.”
It makes sense to not try and compete too heavily here – there are upwards of “about 20 MVNOs on the market”, Wibberley notes, but the trick is to reward customers who pay their loans regularly and on time; an “engagement and behavioural enhancement device:, he says.
Keeping up with competitors
So, what do banks and other creditors need to do to compete with these fintechs? Brennan thinks traditional lenders could benefit from “thinking about credit card debt in a slightly different way.”
To get a credit card, there are a lot of base costs because “the system is old and clunky”, and so banks want to “ensure they get bang for their buck”.
“Giving a lower credit limit doesn’t make financial sense for them because their system costs are so high,” Brennan continues. As such, banks usually only look to hand out cards with limits upwards of R20,000, where Fintechs often have a R5000 cap.
“But I wouldn’t be surprised if Capitec were thinking about this already,” Brennan says. In some ways, they have already started doing it – “I think they’ve just done it much more conservatively, whereas guys like Weaver [Fintech] are far more aggressive.”
“It’s really fundamentally about how much you can charge for the risk,” Alexander argues. “If you have the ability to charge appropriately, then your market will be very, very large.”
Top image collage: Rawpixel; Currency.
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