Credit, hailed by the National Credit Act as “a cornerstone of modern capitalism,” is vital for economic growth and commercial activity. However, in South Africa, the irresponsible use of credit has created a challenging cycle of debt, allowing people to spend beyond their means and use credit for everyday purchases. To address this issue, innovative start-ups like LayUp offer alternatives, such as the lay-by payment plan, to help individuals avoid the pitfalls of over-indebtedness and manage their finances more responsibly.
Credit crunch: South Africans battle instant gratification
Since the 1990s, South Africans (both in and out of work) have been borrowing extensively to meet their own and their dependents’ needs and expectations, leaving the country with unsustainable levels of debt, much of it with unsecured lenders and loan sharks. In this context, South Africa’s household credit environment is propelled by high consumer indebtedness and a weak job market.
According to S&P Ratings, South Africa’s big banks are expected to lose R74 billion in 2024 from unpaid loans as South Africans feel the pressure of rising living costs and continued high interest rates. This assessment was drawn from Absa’s recent financial results as an example of how local banks are being affected by South Africa’s challenging macroeconomic conditions. Commercial banks initially benefit from rising interest rates as they collect more interest from their existing set of loans, significantly increasing their profit margin. S&P Ratings warned that this could manifest in rising credit losses, reducing bank capital and profitability.
Credit is king in a landscape driven by instant gratification and relentless consumption. However, start-ups are emerging to offer alternatives to the over-used credit card.
Start-ups challenge South Africa’s credit culture
In this credit crisis, alternative payment methods like lay-by systems offer a beacon of hope. Lay-by allows consumers to purchase items by paying for them without incurring interest. This method not only helps consumers avoid debt but also promotes responsible spending.
LayUp Technologies, a pioneering fintech firm, is at the forefront of transforming lay-by payments in South Africa. Founded in 2021, LayUp aims to service the unbanked and address the needs of 25 million South Africans without access to credit. Focusing on financial inclusion provides a tool for economic development and improving the financial well-being of low-income earners. Additionally, it supports the growth and resilience of small, medium, and large enterprises.
Why lay-by is the better alternative to credit
1. Financial discipline
Lay-by systems encourage financial discipline. Consumers pay for items over time, using their available funds rather than relying on credit.
2. No interest
Unlike credit purchases, lay-by transactions do not accrue interest, making them a more affordable option for consumers.
3. Reduced risk of over-indebtedness
By avoiding credit, consumers are less likely to fall into the trap of over-indebtedness, reducing their financial stress and increasing their disposable income.
4. Economic growth
Lay-by systems contribute to broader economic growth and stability by enabling more people to participate in the economy without a debt burden.
Simplifying payments one transaction at a time
According to LayUp founder and CEO Andrew Katzwinkel, traditional lay-by systems are a headache for merchants, retailers, and customers. These systems have high administration costs and low completion rates. Customers endure a cumbersome, analogue application process and must make monthly in-store payments, which is particularly costly for the lower-income market due to additional transport expenses.
“That’s why there were so many delinquencies and high non-completion rates,” Katzwinkel explains. “With LayUp, customers can be active in-store or online and make payments at their leisure. It’s super simple. The customer is fully aware of their progress, ensuring transparency in the process. Once the item is paid off, it’s shipped or collected in-store. For merchants, we remove massive admin work, such as filling out orders and checking up on customers.”
LayUp benefits retailers by offering recurring payment capabilities and sending timely reminders to customers, boosting the completion rate from 60% to 90%.
The high debt levels in South Africa highlight the need for alternative payment solutions that promote financial inclusion and responsible spending. Lay-by systems, championed by innovative companies like LayUp Technologies, offer a viable solution to the credit crisis. By providing a secure and interest-free way for consumers to purchase goods, lay-by systems help reduce the risk of over-indebtedness and support the financial well-being of South Africans.
As the nation grapples with economic challenges, adopting and promoting alternative payment methods will foster a more resilient and inclusive financial environment.
