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SA debt burden catalyses consumer demand for alternative payment solutions

South African consumers are under immense pressure amid record unemployment rates and rising cost of living as the cost of coronavirus pandemic to the economy becomes clearer.
The country’s unemployment crisis was already a major cause for concern prior to the onset of the pandemic. But, Covid has triggered an unparalleled spike in job losses and fears around a deep and persistent recession.

This has dented consumer confidence and reined in spending, with customers trying to save for rainier days and avoid revolving debt. Approximately 45% of consumers intend to decrease spending across most discretionary categories, according to McKinsey.

Paul Behrmann, CEO of buy now pay later (BNPL) payment platform Payflex, says in just a few months, we’ve seen the kind of consumer behavioural shifts in payments that usually take decades.

“The pandemic has upended consumers’ financial lives and typical purchasing behaviours, leading them to be more mindful in their purchasing decisions and reconsider their go-to payments. This uncertain terrain has made flexible payment options like digital wallets and BNPL highly attractive alternatives to traditional payment methods, especially as consumers grow increasingly budget-conscious and demand a greater sense of stability and control over their payments.”

Pressure from all end

The country’s official unemployment rate breached the highest point on record during the fourth quarter of 2020, rising by 1.7 percentage points from the previous quarter to 32.5%, according to Stats SA.

The data showed that 42.6% of the labour force was without work in the October-December quarter, amounting to 11.1 million people. The survey also found 16.5% of those receiving a salary during the lockdown had their pay reduced.

At the same time, TransUnion found the percentage of consumers financially impacted by Covid-19 increased to 82% towards the end of last year. The report noted concern among impacted consumers about their ability to pay their bills and loans remains high at 84%.

Similarly, Eighty20/XDS Online Credit Portal’s Credit Stress Report found an increase of R10 billion in overdue loan balances, bringing the total increase in overdue balances for 2020 to over R33 billion.

Data from Trading Economics echoes this with household debt in relation to gross income expected to reach 72.8% by the end of 2020.

Further adding to consumer woes, the first week of April saw the petrol price exceed the R17 mark as petrol increased by 95 cents and R1 per litre for 93 unleaded and 95 unleaded respectively. This will have a further domino effect on the cost of food and other essential expenses.

No quick fix

South Africa’s road to economic recovery is set to be a long one. A report by PWC, found South Africa’s economy will add only 467,000 jobs in 2021, with employment only expected to return to pre-pandemic levels by 2024.

Behrmann however says it’s not all doom and gloom with some green shoots starting to emerge. The PWC report expects the South African economy to grow by 3.4% this year but says it could expand by 6.7% in an upside scenario (Less restrictive lockdowns, reduced electricity supply challenges, as well as greater fiscal stimulus). This upside scenario would see South African GDP return to 2019 levels by 2022.

Debt-laden consumers demand flexibility

Globally, a different customer has emerged with new behaviours and decision-making criteria as a result of Covid induced financial constraints. And as they adjust to the new post-pandemic normal, their reluctance to take on further debt is set to continue the growth trajectory of alternative payment solutions, both in South Africa and abroad.

In fact, the annual Global Payments Report by Worldpay from FIS found 2020 catapulted payments years ahead of where they were projected to be, saying alternative payments like digital wallets remain the payment method of choice among global e-commerce consumers, accounting for 44.5% of eCommerce transaction volume in 2020. While BNPL’s global market share is expected to double from 2.1% in 2020 to 4.2% by 2024.

Behrmann says the part-payment platform has experienced a significant 85% increase in shopper sign-ups since the start of the pandemic in South Africa. Only entering the South African payments landscape in 2019, he says the instalment payment platform has grown by 75% in just 2 years. He attributes this growth to the Covid-led behavioural shift in payments behaviour.

A different approach to debt

The South African consumer demand for credit fell markedly in 2020. TransUnion found credit card enquiries fell most significantly, with a 49% decline year-on-year.

Unemployment is further driving consumer demand for customer-centric alternative payments which provide cash liquidity without the interest related to credit spending.

“With this challenging financial reality expected to be part-and-parcel of consumers lives for the foreseeable future, consumers are expected to continue approaching debt differently, by adopting budget-friendly and risk averse approaches to payments. And while the credit card is not expected to go anywhere any time soon, the alternative payments landscape has emerged as a major contender in the digital payments arena.”

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