If you live in the U.S., U.K. or Australia, having a personal bank account and debit or credit card is something that’s taken for granted. But elsewhere in many parts of the world, a shocking one quarter of adults — more than 1.7 billion (per the World Bank) — still don’t have access to a personal bank account at all. This lack of access to our increasingly digital financial infrastructure severely limits these have nots’ purchasing power and online shopping options.
For millions of unbanked Latin Americans, shopping online is a two-step process: buying items from a merchant online and then paying for them through cash-based alternative methods, such as boleto bancário (a type of bank slip) in Brazil or a voucher system handled through local convenience stores such as 7-Eleven and OXXO in Mexico, among others.
That scenario might be okay for small purchases, but for cash-strapped individuals or for those looking to buy big-ticket items, the ability to pay in installments becomes critical to making the sale. This has led to an explosion of new Buy Now Pay Later (BNPL) digital options aimed at improving access to online shopping and easing the way for more e-commerce transactions.
Unlike a credit card or a line of credit issued by a bank, BNPL lets consumers pay for purchases via short-term loans that most often have no interest fees for shoppers. These microloans are approved at the time of purchase, and there are two primary ways of borrowing. The first is a point-of-sale loan, in which a BNPL provider partners with merchants to offer financing at checkout. The other is an installment plan that lets people buy online and pay for their items in a predetermined number of installments. Both involve a credit-validation step that is typically managed by the BNPL service provider. The loans are frequently interest-free for customers if they are paid on time. For other transactions an interest charge may be applied up front.
BNPL service providers make their money on the transaction fees charged to merchants, but in return, merchants benefit from reaching more customers, increased cart conversions and higher sales volumes. BNPL providers also validate the customer’s ability to pay through their own soft credit check or underwriting process, taking most of the risk of non-payments and fraud off the merchant’s shoulders.
Paying with installments has been a common practice for more than 30 years in Latin America, so offering digital BNPL solutions is an obvious choice for online merchants looking to woo customers who would otherwise shop in physical brick-and-mortar stores, said Sebastian Fantini, B2B product manager at EBANX, a global fintech company that provides payments solutions, including integration with hundreds of local methods, for players such as Spotify and AliExpress in Latin America.
Nelo, a fintech company co-founded by former Uber executives Kyle Miller and Stephen Hebson, recently raised a $3M seed round to expand its BNPL services in Mexico. The company already has 75 merchants in its system and Nelo’s revenue and active customer base soared by 60% last month.
Why start in Mexico? According to eMarketer, Latin America was the fastest-growing e-commerce market in the world in 2020, with 36.7% year-over-year growth. Despite that, an estimated 86% of all payments are still made in the form of cash. Nelo is focused on bridging that gap to enable more digital commerce.
Miller’s previous experience on the international growth team at Uber and working in markets like Brazil, China, India and Mexico inspired the vision for Nelo.
“Working on [these markets] enabled us to see what was happening across the world in terms of payments, banking and financial inclusion. Mexico was a very large business for Uber, but many of the trips were paid for in cash. And there were significant issues with credit for drivers. So, we had this insight and belief that these technology solutions were going to be deployed across the world in different markets. And we were the right entrepreneurs and the right team to solve the problem,” Miller said.
Nelo offers an Android app that lets customers directly pay their bills and other merchants within the app. The company has a web checkout flow for e-commerce merchants that displays the option to pay Nelo in installments once shoppers are at the checkout page. Merchants get a window into their Nelo transaction activity via a dashboard tool that tracks sales volume and customers. Being able to see each customer’s payment and repayment behavior through the app helps Nelo continue to offer credit with confidence.
“Initially we are focusing on merchants that customers use repeatedly. For example, in our Android app, you can pay for your cell phone bill or your water bill through us. So people are using us like a credit card in terms of everyday purchases. But the way that it’s structured with installments, customers agree it’s just more transparent and easier for everyone,” Miller said.
Nelo’s proprietary underwriting process is multilayered and an important value-add for its merchant partners. “We make sure [customers] are willing and able to repay us. That’s an important part of our strategy. We pull information from the credit bureau. We can see what somebody’s income is and what their expenditures are, and we have a bunch of data we use from their device to protect against fraud. The fraud rate in Mexico on credit cards is one of the highest in the world, so for us to provide protection against that is very valuable for merchants,” adds Miller.
New (and not-so-new) players compete for the BNPL market
Nelo is far from the only company banking on the BNPL boom in Mexico and other Latin American territories. The field of competitors is growing more crowded by the day. U.S.-based fintech startup Alchemy recently announced plans to offer its services in Mexico. Colombia-based Addi recently established an office in Brazil and has its eye on Mexico as well. Fintechs dlocal and Dinie have teamed up to offer Dinie Pay for small to medium enterprises in Brazil. Kueski is an established player in Mexico with plans to scale their BNPL services in the region, and that’s not the end of the list.
Even in the U.S., U.K. and Australia where credit cards are widely available, the opportunity to utilize BNPL services has become an attractive and convenient option for both buyers and merchants, particularly in the wake of the pandemic and the global shift to more online shopping. According to Salesforce data, global BNPL transactions rose 109% as compared to the 2019 holiday season. Two months later, sales made with BNPL jumped 215% from the same period in 2020.
Global players like Affirm, Afterpay and Klarna are well on their way to becoming household names with new user growth and transaction volume exploding. Swedish fintech Klarna saw its customer base grow faster than any of its European and U.S. rivals last year. Australian player Afterpay recently announced its sales are up 123% from a year ago for the quarter. San Francisco-based Affirm went public late last fall and is launching its first debit card with BNPL functionality. Not to be outdone, last August PayPal entered the game with its “Pay in 4” interest-free installment loans for purchases between $30 and $600. The service is only available in the United States for now, but global expansion is in the works.
According to CB Insights, the global BNPL industry is projected to grow 10 to 15 times its current volume, topping $1 trillion in annual gross merchandise volume by 2025. It’s too soon to say which of these BNPL players will earn the most customer loyalty over time, but it’s clearly a market to watch.