BUYING TIME
With total funding so far of over $130 million, Hosam Arab and Daniil Barkalov—co-founders of Dubai-based buy now, pay later startup tabby—are riding the growth of e-commerce in the Middle East while trying to make online payments simpler for an evolving region. Investors like what they’re seeing.
FFrom Dubai to Riyadh, the hottest shopping craze today is not just over a new iPhone or the latest fashion; it's the way consumers pay for their online purchases. Apps offering buy now, pay later (BNPL) services have boomed in popularity in the Middle East after the pandemic saw online spending accelerate. Popularized globally by companies like Affirm, Klarna, and Afterpay, BNPL apps allow shoppers to make a purchase online or in-store and split up the payment into installments that are spread out over time. That's attracting younger consumers, with the industry accounting for nearly $100 billion of global e-commerce transactions in 2020, according to payments technology company Worldpay.
BNPL apps in the Middle East are shaping up to have a unique impact on e-commerce in a region where obstacles to online payments have complicated growth. “Customers are looking for alternatives; they're looking for a better way to pay,” says Hosam Arab, CEO of Dubai BNPL startup, tabby. “Essentially, our service is seamless payments at checkout.” The former CEO of online fashion retailer Namshi, Arab co-founded tabby in 2019 alongside Daniil Barkalov, another e-commerce vet, after spotting an opportunity to position BNPL as an alternative to the primary local payment option: cash-on-delivery, which has served as an inefficient yet necessary solution for e-commerce in a region where card usage is low.
So far, local consumers appear to be buying what tabby's selling. The company reports that its app has over a million active shoppers across the U.A.E. and Saudi Arabia, who use it to access over 3,000 brands, including Adidas, IKEA, SHEIN, and Marks & Spencer. Investors are buying in too—in July 2021, tabby announced that it has raised $50 million in a Series B led by Global Founders Capital and STV, bringing its total funding to over $130 million and its valuation up to $300 million in under two years, cementing it as an early leader in a crowded field of local BNPL startups. “Given what we've seen in other markets, we were convinced that there's a real need for BNPL in the Middle East,” says Saed Nashef, a founding partner at Raed Ventures, one of tabby's early investors. “It's solving a tangible pain both for merchants and for consumers, and significantly lowering transaction friction.”
In the U.A.E., tabby is tapping into an expat customer base using BNPL to buy fashion and furniture, while in Saudi Arabia, the app is proving popular with a techsavvy crowd that skews young and female. Meanwhile, merchants are adopting the service to increase sales and entice customers to embrace larger purchases.
“BNPL essentially addresses today's consumer's most common dilemma—the desire for instant gratification, curbed by the inability to pay upfront,” says Anamika Priyadarshi, Head of Marketing for Dubai-based retail group Jashanmal, which uses tabby. “BNPL strikes the balance between making the purchase and the need for long-term budgeting.” BNPL has helped Jashanmal boost e-commerce sales by retaining customers and attracting new ones while cutting down on shopping cart abandonment, says Priyadarshi. Looking ahead, Jashanmal sees BNPL as a key payment mode and wants to use it for other brands in the group's portfolio. Another retailer using tabby's service, VogaCloset, reports the main impact is increasing basket value. “Customers who know about this option early on in the buying journey will buy with confidence that they can split the payment,” says Fadi Zaghloul, VogaCloset's COO.
Alongside tabby, other startups vying for a slice of the market include Postpay, Cashew, Spotii, Shahry, and Tamara, which are all under three years old, while companies like Aramex and fintech platform MNTHalan also offer BNPL services. Although independent data on the region's BNPL market is sparse, tabby and other players are reporting rapid growth. “We're seeing uptakes significantly beyond where we've seen them in other markets,” says Arab. He claims the share of consumers using BNPL at participating brands has hit 20% to 30% of checkouts within a few weeks of launching with tabby, and in some cases has reached 40 to 50%. Comparatively, rates in more mature markets start at roughly 5% to 10% after launch, he says, before leveling off around 20% to 25%.
That traction has investors shopping for BNPL deals. In 2021 alone, tabby raised two rounds of $50 million each from global and local investors such as Global Founders Capital, STV, and Partners for Growth.
Competitors are raising big money too. Rival service Tamara has secured $116 million since launching in 2020 in Saudi Arabia and reports working with over
1,000 merchants and a user base growing 180% per month. Global BNPL competitors are also eyeing the market. Zip, an Australian BNPL firm, announced in May 2021 that it was fully acquiring Spotii in a deal valuing the Dubai firm at $20 million. A month later, Dubai's Postpay raised a $10 million round that included participation from Australia's Afterpay.
“This is a market that is highly competitive at the moment, and to a large extent it is a bit of a land grab to go out and acquire merchant relationships,” says Arab. “This funding allows us to do that.” The funds are helping expand tabby's product portfolio and enter new markets while providing the capitalization needed to underpin transaction growth. That's because tabby pays merchants upfront for the cost of a sale, with shoppers then paying tabby back across installments.
BNPL models do vary, but regional players offer broadly similar services. tabby allows users to split payments into four interest-free monthly installments. A missed payment results in a one-time fee and suspension from the service until they're paid up. Unlike BNPL companies outside the Middle East, tabby does not charge interest; instead it earns revenue by charging merchants transaction fees.
Although BNPL is enjoying regional growth, challenges loom. Globally, the industry has its critics. Some paint BNPL as a cousin to credit cards but without the same consumer protections, which can potentially saddle users with debt by allowing unsustainable spending. “We've seen and read those criticisms globally, and I think they're going to make their way over here as well,” says Arab. But he doesn't think those critiques are relevant, as tabby doesn't charge interest. He believes that any pushback will mostly come from those businesses that BNPL is disrupting.
Regulations could also pose challenges. Arab reports that they're in constant communication with their local regulators and, alongside Tamara, tabby has gotten approval from Saudi's central bank to test products under a regulatory sandbox. So far, it seems those obstacles have done little to deter regional BNPL startups or scare off investors and global players eyeing the market.
Arab came upon the opportunity after co-founding Namshi in 2011, making the online retailer an early entrant in the region after Souq. com. Before that, he studied electrical engineering at Queen's University in Canada and attended Harvard for an MBA. While he was still running Namshi, an investor introduced Arab to Barkalov. A software engineer by training, Barkalov worked in Moscow for the online retailer Lamoda. The pair stayed in touch.
At Namshi, Arab became well acquainted with regional e-commerce payment issues. “There was very little flexibility in how customers paid, and therefore they ended up paying in cash,” says Arab. This was highly inconvenient for customers and retailers alike. According to a 2019 Bain & Company report, cash-on-delivery was the preferred payment method for around 62% of MENA's online shoppers.
At that point, BNPL wasn't a new concept— installment payment plans long predated e-commerce— but Fintech companies like Sweden's Klarna, founded in 2005, were adapting it for online payments. Arab remembers coming across Australia's Afterpay roughly four years ago and being skeptical. “My question was why would a customer want to pay in installments for a pair of shoes?” he admits.
BNPL proved slow to arrive in the Middle East partly because e-commerce was slow to mature regionally. The industry lacked logistics and payments infrastructure, and there wasn't enough customer data available. “We needed to get to a certain maturity level before a kind of complex solution like buy now, pay later would have had the chance to succeed,” says Arab.
The pieces needed for BNPL eventually fell into place as e-commerce grew, highlighted by Amazon's acquisition of Souq in 2017. At Namshi, Arab became CEO in 2018, shortly after Emaar Malls took a 51% stake in the company. Emaar then fully acquired Namshi in early 2019 in a deal worth $129.5 million, but Arab resigned only weeks afterward. In an email to staff, he said it was a natural time to move on.
BNPL was on his radar. Eyeing his next move, he called Barkalov, who had left Lamoda to become CEO of Revo Technology, a Russian firm providing financial services for merchants, including BNPL. Barkalov shared his experience, and they got talking about the Middle East. Suddenly, Barkalov was intrigued: the