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How the BNPL risk landscape impacts e-commerce growth

The buy now pay later (BNPL) market is undergoing rapid expansion across the Middle East, helping the e-commerce sector flourish. This is driven partially by new consumer payment preferences that evolved through the pandemic. According to a report partnered with Euromonitor International and Dubai e-commerce zone EZDubai, the total market size for e-commerce in the Middle East and North Africa (MENA) region has expanded to $31.7 billion in 2021 and is expected to reach $49 billion by 2025.

BNPL providers also attract a significant portion of regional tech funding, with BNPL UAE-based platform Tabby receiving the fourth most funding out of any start-up in MENA in 2021 at $130 million and Tamara receiving the most funding of any other Saudi Arabia tech start-up in 2021 at $116 million. The market has attracted increased attention from international players like UK-based Farfetch, which is supporting Chalhoub Group, one of the Arab world’s biggest franchise operators of luxury brands, to grow its presence in the Middle East’s $8 billion luxury retail market.

Balancing act

Such international operators need to be aware of a careful balancing act. Because BNPL enterprises often do not charge interest, they may not fall under the definition of credit and credit rules. However, the newness of this product means it faces an unclear set of legalities in the UAE and Saudi Arabia. As a result, BNPL is often brought under the jurisdiction of free zone authorities and treated under their credit rules, creating an extra layer of due diligence.

This is not to say that there is an aversion in the region to BNPL, which is expanding in markets such as Saudi Arabia, where two-thirds of the residents are under the age of 35. The e-commerce market has doubled from $3 billion in 2019 to more than $6.5 billion in 2022. It is anticipated to double once again to more than $13 billion by 2025 and is also the driving force behind the expansion of BNPL.

Changing risk landscape

The expansion of BNPL platforms in the Middle East is also changing the risk landscape. Part of this is structural: BNPL is ultimately about consumer convenience, with retailers and providers of these payment solutions aiming to create a smooth user journey with fewer barriers. In addition, BNPL is not a traditional credit offering, which means there is less insight into the amounts of debt that consumers are incurring.

Cash-on-delivery (COD) accounted for more than 60 per cent of e-commerce sales in the Middle East pre-pandemic and this regional preference had historically proven to be an obstacle to e-commerce growth in the Middle East. BNPL helps provide a solution to meet what both consumers and merchants want: consumers want to pay after delivery, and merchants want to remove the burden of collections. BNPL providers should also consider that there is a markedly lower penetration of credit cards in the Middle East compared with globally and as a result, many in the Middle East are less familiar with the authentication processes that such products require.

That is a concern because one of the ways that criminals exploit BNPL platforms is by using illicitly obtained details to authorise purchases. Unauthorised BNPL purchases require a fraction of the total cost of goods upfront, which means fraudsters are rewarded using very little out-of-pocket expenses. The reward is compounded when fraudsters resell the item.

Operators also need to find an effective way to manage credit risks, leveraging data intelligence to derive deep insights for insightful credit decision-making. A BNPL provider’s technology stack should be layered and advanced. A sophisticated set of prediction models can help identify suspicious transactions and exceptions, decreasing vulnerability from bad actors. This demonstrates a lower risk to potential lenders to grow BNPL businesses, which results in more favourable lending terms to aid the growth of new BNPL platforms.

Increasing Diligence

E-commerce operators should consider increasing diligence along with new BNPL companies expanding in a nascent and developing Middle Eastern BNPL market. Organisations should take proactive steps to address vulnerabilities existing within the technology and its processes. Such an approach is vital, particularly with the number of malicious bot attacks now standing at 10 per cent of transaction volume both in the UAE and across wider EMEA, according to the LexisNexis® True Cost of Fraud™ Study. Bot attacks have increased by 39 per cent in the UAE in 2022 compared with the same period in 2021.

To help mitigate and tackle such threats, artificial intelligence and machine learning solutions can analyse risks, data and the architecture of the BNPL technology. Utilising fraud detection and data analytics tools can bolster the integrity of providers’ BNPL solutions to thwart fraudsters. Such an approach has become imperative to help sustain business models that provide a competitive edge over other BNPL platforms and solidify trust amongst customers. Effective management of their business risk profiles will enable MENA BNPL businesses to hold their own against the global tech giants moving into leadership positions.

All information contained herein is for informational purposes only and not intended to and shall not be used as legal advice. LexisNexis Risk Solutions does not represent nor warrant that the information contained herein is complete or error-free.

Dan Hewitt is regional head of LexisNexis Risk Solutions (MENA).

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