In the last few years, buy now, pay later (BNPL) has become increasingly popular in the Middle East. While many purchase high-end items through BNPL schemes, they also grapple with managing payments. What seemed like a convenient path to acquiring coveted possessions now requires careful financial juggling. 

Until now, unlike other traditional methods of lending, BNPL was unregulated. 

But last month, the Central Bank of the UAE introduced a new set of rules for BNPL products and services to monitor companies that offer credit and protect the consumers by bringing in stricter requirements on who can offer BNPL schemes.

The Central Bank’s new directives require BNPL companies to obtain licenses before operating in the market, providing an additional safeguard for consumers.

The move aims to shield consumers, particularly in the UAE and Saudi Arabia, from risks of over-indebtedness and potential exposure to predatory practices, and encourage responsible lending.

According to the latest regulations, the maximum credit a borrower can obtain from a lender is either $5,445 or three months’ worth of their net income, whichever is less.

It is a significant step towards ensuring the well-being of consumers.

CONSUMER AWARENESS

“The increased transparency of BNPL fees in the new regulation is expected to drive consumer awareness and trust, which can lead to higher adoption and usage. As consumers become more informed about the associated costs and terms, it will likely contribute to more responsible spending patterns and sustainable adoption of BNPL,” Salima Gutieva, Visa’s VP and Country Manager for UAE. 

During inflation and high interest rates, BNPL has significantly driven a surge in online expenditures for shoppers. Tabby, a Dubai-based BNPL startup that achieved unicorn status in 2023, is in the process of adhering to new regulations. 

Co-founder and CEO Hosam Arab says, “We will inform all UAE customers of changes to our terms and conditions, should they need to be updated to meet regulatory requirements.”

“We welcome regulation that brings safety to consumers in our industry. We anticipate our core service offerings to remain mostly unchanged as we work towards fully complying with the Central Bank of the UAE regulations,” adds Arab.

WHAT REGULATIONS MEAN FOR CUSTOMERS

Globally, the increased adoption of BNPL coincides with a peak in credit card debt, reaching historic levels, and a nearly twofold rise in delinquency rates over the last two years.
Also, tracking BNPL loans, in particular, can be challenging, potentially leading more consumers into financial difficulties.

“I refrain from using credit cards or BNPL payment for my purchases. These options might create a perception of having more funds than I possess. My spending decisions are solely based on my real money, avoiding reliance on credit or BNPLs with interest,” says Hoda Ghavidel, a Dubai-based luxury retail and fashion strategist and founder of Mood La Mode.

Some experts say BNPL loans pose a more intricate tracking challenge than credit cards.

As per Arab, some Tabby customers might be subject to additional checks with the credit information agency for larger basket sizes. “Still, for most purchases, we don’t foresee a meaningful impact,” he says. 

According to Wells Fargo, the BNPL category is one of the fastest-growing segments in consumer finance. And installment buying often leads consumers to impulsive purchases beyond their financial means.

“The regulation for any credit facility is important to safeguard the financial well-being of the region,” says Vaibhav Kashyap, CEO & Co-founder of Wellx, a UAE-based wellness-focused platform with embedded insurance.

DEBT VS. GROWTH 

Although the frequency of unpaid BNPL bills remains unrecorded, individuals utilizing this service are more than twice as prone to delinquency on other credit products, including car loans, personal loans, or mortgages, as indicated by a 2023 study conducted by the Consumer Financial Protection Bureau. 

Does regulation imply more challenges for local BNPL players?

“We don’t necessarily see them as challenges, but rather a natural evolution of a maturing market with BNPL becoming a preferred payment method,” Arab said. 

According to the new rules, banks with established customer trust and financial infrastructure can integrate BNPL services into their platforms, which can enhance customer engagement and loyalty and co-branded products.

According to Gutieva, in responsible use of digital payments, consumers should enjoy the rewards and benefits associated, including security, convenience, and opportunities for growth and prosperity.

Limits and regulations could be beneficial to prevent excessive debt and encourage responsible spending, says Ghavidel. “It helps mitigate the risk of users overcommitting to payments beyond their means, and it will also help make more mindful purchases and avoid waste and overspending.”

TACKLING PHANTOM DEBT

Arab underscores the significance of prudent spending practices and regulations promoting consumer safety within the industry. “We welcome regulation that brings safety to consumers in our industry.” 

Arab adds that there will be minimal changes to Tabby’s core service offerings as it works toward fully complying with the Central Bank of the UAE regulations.

Similarly, Gutieva, while emphasizing the importance of adopting responsible spending habits and avoiding debt, says, “Visa collaborates closely with local clients and partners to support governmental and regulatory initiatives for secure and inclusive digital commerce, benefiting consumers, businesses, and the national economy.” 

With the current economic climate remaining unchanged in the coming months and more people turning to non-bank loans as a means of alternative finance, the new guidelines are expected to further stimulate the growth of the BNPL industry by attracting well-funded players, and the inclusion of the Central Bank widens the safety net for consumers. 

Note to readers: Fast Company Middle East had contacted Tamara, who did not respond on time.