The BackEnd explores the product development process in African tech. We take you into the minds of those who conceived, designed and built the product; highlighting product uniqueness, user behaviour assumptions and challenges during the product cycle.

Chijioke Dozie wondered how Nigerians would prefer to buy consumer electronics they could not afford or did not want to pay full price for at once.

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

It was a tiny sample size but the favoured option harked back to Carbon’s early days. When the company was known as Paylater, they made plans to partner with e-commerce companies and offer interest-free loans to online shoppers; “but the likes of Jumia and Konga didn’t go for it so we pivoted,” Dozie says.

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

BNPL startups raised a record $1.5 billion globally in 2020, according to CB Insights. By 2025, the sector is expected to hit $680 billion in transaction volume worldwide.

This week, Carbon became Nigeria’s digital BNPL first-mover after announcing and launching Carbon Zero. With Carbon Zero, consumers can shop online with Carbon-verified merchants and pay in instalments at 0% interest. “No hidden charges,” the company insists.

But barely a few days after the product’s launch and announcement, Carbon Zero’s promise is being contested. 

Many people’s curiosity boils down to two core questions; how do Buy Now Pay Later loans work, and can it work in Nigeria?

How Affirm and Klarna do it

Perhaps by coincidence, Carbon was founded the same year former PayPal co-founder, Max Levchin, started Affirm. So it is apposite to benchmark the Nigerian fintech’s ambitions by what the American billion-dollar company has achieved.

Like Carbon, Affirm offers interest loans. But the latter has become notable for helping merchants “convert a sale and power a payment.” 

Affirm makes money by charging merchants for these conversions. Merchants that use its services sell big-ticket items with the expectation that the zero-interest instalments will boost sales significantly.

One such merchant is Peloton, the fitness company that sells bikes and online gym classes. Peloton was responsible for 28% of Affirm’s revenue in the 12 months to June 2019. 

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

In Europe, Klarna is the BNPL leader and currently the second most-valuable startup at an $11 billion mark. 

The Swedish fintech gives users a 30-day period to try before they buy. They also offer interest-free instalments that are to be paid every two weeks. Users access Klarna either on the fintech’s app or at the checkout point of stores like Asos, Adidas, H&M, and Abercrombie & Fitch.

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

They do the backend work of confirming the shopper’s risk profile via a soft credit check, settling the merchant for the purchase and notifying the shopper of their payment schedule. They also charge merchants a transaction fee.

As to concerns that “pay with Klarna” could seduce and possibly trap millennial shoppers in debt over unnecessary spending, the company says it has safeguards; loans are only offered to those who can pay, and there are thresholds against unlimited shopping. 

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

Carbon’s Nigeria problems

For retailers, two factors make BNPL appealing: an increase in e-commerce adoption and the desire to reduce high cart abandonment rates. For users, BNPL replaces credit cards and makes it possible to buy items that would not normally fit into a monthly budget.

But there are more factors to consider for this experiment to succeed in Nigeria, Carbon’s test market.

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

Nigeria’s central bank wants banks to lend more to activate this credit culture but it remains a difficult proposition

Through indiscriminate money printing and borrowing below inflation rates, the Central Bank and the government unwittingly weaken confidence in the currency.

There is also an identity and data problem. BNPL works in developed countries because borrowers are wary of tainting their credit scores (Klarna reports to credit bureaus). While Carbon adds to the groundwork of developing Nigeria’s credit rating industry, it is far from stable.

And consumption? Economists say it is a function of disposable income. A consumer’s confidence in taking a loan, even a zero-interest one, is as strong as their ability to pay. 

As it happens, there are just not many Nigerians making enough money. About 98% of Nigerians have less than ₦500,000 (~$1,030) in their accounts, according to the Nigeria Deposit Insurance Corporation’s 2016 data.

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

Testing the waters, from ground zero

Dozie’s product managers have considered how these factors affect Carbon Zero’s potential.

To entice retailers and guarantee their money, Carbon Zero requires a user to earn a minimum of ₦200,000 (~$400) monthly and make a 20% down payment on any purchase.

Carbon pays the retailer in full for every purchase and then follows users up on repayment. Because users must have a Carbon account, there will be a credit score to check potential for defaults.

Yet, there remains a crucial fault line in Carbon Zero’s present iteration; large differences between the market price of items and how much they are sold by Carbon-verified merchants. 

One instance: AirPods Pro cost ₦162k through Carbon Zero but ₦103k at a Lagos market price.

Where an iPhone 12 Pro costs ₦513,615 ($1,059) in the market but ₦695,000 ($1,433) through a Carbon vendor, that amounts to an effective interest rate of 71%.    

Yele Oyekola, Carbon’s product manager for Zero, tells TechCabal they have no control over the prices, and that “Some of our merchants also provide after-sales support which I believe has been factored in their pricing.”

He confirms that Carbon hopes to make money by charging “a small commission on each transaction”; however, the price of items are determined wholly by merchants.

This issue of the size of markups set by retailers will ultimately decide if Carbon Zero will reach Affirm and Klarna’s aspirational success. 

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

“It’s a concern and it’s something we’ll address with our merchants but we’ve also carefully selected them and product quality is something we don’t have to worry about,” he says.

“We are expanding our merchant pool so we’ll be providing more options for our customers to choose from.”

If they pull it off – reducing and eventually solving this initial price problem – then perhaps Nigeria’s own BNPL wave will start rising.

Alexander Onukwue | Author