How do BNPL startups minimise risks from bad borrowers?

May 19, 2023|Nchedolisa Akuma

Key questions this article answers:

What infrastructure gaps do Nigerian lenders face when verifying borrowers' identity and assessing their creditworthiness?
Between 2016 and 2023, NIMC (Nigeria’s national identity agency) registered an additional 85 million people with a national identity number. How can NIMC improve its services to enable lenders get a more robust picture of a borrower’s identity?

Earlier this year, I wrote a piece on trends to watch out for in Nigeria’s fintech landscape in 2023. In it, I highlighted ‘Buy Now Pay Later’ (BNPL) as one of the trends that will gain momentum this year. For context, buy-now-pay-later is a service that blends payment and credit by allowing consumers or businesses to pay for purchases over time rather than in one lump sum.

Events of the year have already started to align with my position. BNPL companies like CredPal announced partnerships with Bolt to let riders pay for rides at the end of the month. A few days ago, M-kopa, an asset financing platform that allows users to pay for new smartphones or solar-powered systems in instalments, announced a $255 million raise (the second-highest raise by an African fintech this year). And right in the middle of a VC funding slump! Thankfully, this also means I get to keep my job, and Mama will be proud.

But optimism aside, these companies have a steep mountain to climb. One big hurdle is Nigeria’s massive information asymmetry which leaves lenders with little information about borrowers. According to VerifyMe, a digital ID solutions provider, 100 million Nigerians don’t have formal identification. Making lending sometimes appear like a wrestling match between brutish lenders chasing slippery borrowers to recover their funds.

But these problems are also forcing founders to get creative. In this article, we will look at how BNPL companies innovate ways to lower borrower default risks.

Before that, let’s consider the factors contributing to the broken credit landscape that players have to operate in.