The back end explosing the product development process in African technology. We bring you into the minds of those who conceived, designed and built the product; Highlighting the uniqueness of the product, assumptions about user behavior and challenges during the product cycle.

–

Chijioke Dozie wondered how Nigerians would prefer to buy consumer electronics that they couldn’t afford or that they didn’t want to pay full price for right away.

As the co-founder and CEO of Carbon, he leads a Profitable business which gives millions of dollars to consumers directly; but Chijioke knows that the surface of consumer credit has barely been scratched. So he tweeted a poll on his timeline on December 27, 2020.

It was a tiny sample size, but the preferred option dates back to Carbon’s early days. When the company was known as Pay later, they planned to partner with e-commerce companies and offer interest-free loans to online shoppers; “But people like Jumia and Konga didn’t choose, so we turned,” Dozie says.

He found a way to revive the company’s plans to join the global marketplace Buy Now Pay Later wave (BNPL) is currently managed by Affirm in America, Klarna in Europe and Afterpay in Australia. PayPal entered the sector last year.

According to CB Insights, BNPL startups raised a record $ 1.5 billion worldwide in 2020. By 2025, the sector is expected to reach a global transaction volume of 680 billion US dollars.

This week, Carbon became Nigeria’s digital BNPL first mover after the announcement and Introduction of Carbon Zero. With Carbon Zero, consumers can shop online at carbon-verified retailers and pay in installments with 0% interest. “No hidden costs,” emphasizes the company.

But just days after the product was launched and announced, the promise of Carbon Zero is being challenged.

Many people’s curiosity boils down to two key questions; How do buy-it-later loans work, and can it work in Nigeria?

How Affirm and Klarna do it

Perhaps by accident, Carbon was founded the same year that former PayPal co-founder Max Levchin founded Affirm. It is therefore appropriate to measure the ambitions of the Nigerian fintech against what the American billionaire company has achieved.

Like Carbon, Affirm offers interest rate loans. The latter, however, has become known for helping dealers. “convert a sale and drive a payment. ”

Affirm makes money charging merchants for these fees Conversions. Merchants who use his services sell large items in the expectation that the interest-free rates will increase sales significantly.

One of these dealers is Peloton, the fitness company that sells bikes and online fitness classes. Peloton was responsible for 28% of Affirm’s sales in the 12 months ended June 2019.

Another is Shopify. Affirm offers its product on Shopify merchant sites in a partnership that gives Shopify a stake in Affirm.

In Europe, Klarna is the leader at BNPL and currently the second most valuable Starting at $ 11 billion.

The Swedish fintech gives users a 30-day trial period before they buy. They also offer interest-free installments that are payable every two weeks. Users access Klarna either via the fintech’s app or at the checkout of stores such as Asos, Adidas, H&M and Abercrombie & Fitch.

Klarna actively encourages shoppers to shop at these stores without paying immediately.

They do the backend work by confirming the buyer’s risk profile via a gentle credit check, billing the merchant for the purchase, and informing the buyer of their payment plan. They also charge traders a transaction fee.

to Care for that “Pay with Klarna” could seduce millennial buyers and possibly catch them over-indebted unnecessary expenses, the enterprise says it has security measures; Loans are only offered to those who can pay and there are limits to unlimited shopping.

Affirm, Klarna, and similar startups promise to help users better manage their cash flow. Their rise suggests that transparent interest-free credit products will persist and inevitably spread to Africa.

Carbons Nigeria Problems

For retailers, two factors make BNPL attractive: an increase in e-commerce adoption and a desire to reduce it high abandoned cart Rates. For users, BNPL replaces credit cards and enables the purchase of items that normally do not fit into a monthly budget.

However, for this experiment to be successful in Nigeria, the test market for carbon, other factors must be considered.

Affirm and Klarna build on three existing institutions: a consumer credit culture, a well-structured identity infrastructure and heavy consumption as a social norm.

Nigeria’s central bank would like banks to lend more to activate this credit culture, but it remains one difficult proposal.

By indiscriminately printing money and borrowing below inflation rates, the central bank and government unwittingly weaken confidence in the currency.

There is also an identity and data problem. BNPL works in developed countries because borrowers are careful about falsifying their creditworthiness (Klarna reports to credit bureaus). While carbon contributes to the foundations of development Nigeria’s Credit Scoring Industry ”, it is far from stable.

And consumption? Economists say it is a function of disposable income. A consumer’s confidence to take out a loan, including an interest-free loan, is as strong as his or her ability to pay.

It just so happens that not many Nigerians make enough money. According to 2016 data from the Nigeria Deposit Insurance Corporation, about 98% of Nigerians have less than 500,000 yen (~ $ 1,030 USD) in their accounts.

This reality discourages traditional banks or retailers who may want to offer low or zero interest rates. Not only is it possible that they will lose their money or that the naira they will receive in the future will be worth less than what they lend today, but they will also not find enough people to even get the loans.

Testing the waters, from Ground Zero

Dozie’s product managers have pondered how these factors affect the potential of Carbon Zero.

To attract retailers and guarantee their money, Carbon Zero requires a user to earn at least 200,000 yen (~ $ 400) monthly and to pay a 20% deposit on every purchase.

Carbon pays the merchant in full for every purchase and then follows the users in the repayment. Since users are required to have a carbon account, a credit score is created to check for possible defaults.

Still, a key fault line remains in the current iteration of Carbon Zero; large differences between the market price of items and the amount sold by carbon certified dealers.

For example, AirPods Pro priced 162,000 yen through Carbon Zero, but 103,000 yen at a market price in Lagos.

If an iPhone 12 Pro costs 513,615 yen ($ 1,059) in the market but costs 695,000 yen ($ 1,433) through a carbon supplier, that’s 71% effective interest rate.

Yele Oyekola, Carbons Product Manager for Zero, tells TechCabal that they have no control over prices and that “some of our dealers also offer after-sales support which I believe has been factored into their prices.”

He acknowledges that Carbon hopes to make money by charging “a small commission for every transaction”; However, the price of the items is entirely determined by the retailers.

This issue of the level of markups set by retailers will ultimately determine whether Carbon Zero will match Affirm and Klarna’s ambitious success.

Oyekola admits that consumers could be put off if the 0% loans turn out to be more expensive than paying cash or taking out a bank loan.

“It’s a concern we’ll be addressing with our dealers, but we’ve also carefully selected them and we don’t have to worry about product quality,” he says.

“We are expanding our dealer pool in order to offer our customers more options.”

If they can – reduce and eventually solve this initial pricing problem – then Nigeria’s own wave of BNPLs may rise.