Short-term credit startups in Middle East flourished in light of COVID-19

By Ashika Rajan, Trainee Reporter
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Financial technology startups in Saudi Arabia and the United Arab Emirates offering online short-term credit stated that they are enjoying exponential growth as the coronavirus pandemic drives a shift in consumer spending online.

In a region where consumers have traditionally been skeptical to pay for items before receiving them, digital buy now, pay later (BNPL) shopping is relatively new.

However, Saudi Arabia-based Tamara, as well as UAE’s Spotii, Tabby, and Postpay, all claim that adoption has considerably exceeded predictions. And it’s catching the attention of investors. Tamara raised $110 million in financing and equity this month, a sizable sum for a Middle East startup in its early stages.

Tabby has raised nearly $30 million, including funding from Abu Dhabi state fund Mubadala.

Tabby Co-Founder and Chief Executive Mr. Hosam Arab stated that “We’re constantly having to re-forecast our numbers just because we constantly get surprised by the consumer adoption.”

There is no independent data on the Middle East BNPL market, which includes Shahry in Egypt; all of the companies in the sector are in the early stages of startups, with several only starting operations last year.

The service grew in popularity during the pandemic when people were saving money and looking for other ways to borrow money.

According to a 2018 report by British security firm G4S, BNPL companies in the Gulf present themselves as an alternative to cash on delivery, which is the most frequent payment option for online purchases in many Middle East countries.

However, Mr. Anil Malhotra, chief marketing officer of digital payments business Bango, stated that a cultural challenge for BNPL in the Gulf was ensuring that it “didn’t look or smell like credit.”

Interest on loans is prohibited under Islamic customs, which has stopped some Middle Eastern consumers from using credit cards.

While those who checked out using BNPL were repeating users, most buyers chose to pay by card or cash on delivery, according to Crate, a Saudi Arabian independent retailer that launched Tamara on its website last August.

Mr. Rayan Fadul Chief Executive Officer Crate remarked that half of all purchases are paid with a credit card, while cash on delivery accounts for 40 percent of all online transactions, with BNPL accounting for 10 percent.

He believes that Consumers in the region are still new with BNPL who are wary of using a product they don’t yet fully understand.

Physical opportunity

The model varies but BNPL companies let customers pay in installments over a period of weeks or months. Gulf providers do not charge interest and instead make the majority of their money through merchant fees.

As BNPL companies make money via merchant commissions and late fees rather than interest payments, they sidestep the legal definition of credit – and credit laws.

However, the industry has come under scrutiny, with regulators in the UK and abroad evaluating or tightening restrictions and some regulators saying that technology companies that offer BNPL should be regulated similarly to ordinary lenders.

As the pandemic’s effects fade, investors see an opportunity for BNPL firms to seize more business at the shops in the Middle East.

Alshaya Group, a Kuwaiti retailer with Middle East franchising rights for Starbucks and Hennes & Mauritz (H&M), is intending to roll out Postpay in a variety of online stores after trialing it this year in the UAE at Footlocker.

Related: COVID-19: Most UAE consumers plan to try digital payment methods