Banking Article, Banking Finance 2022, Banking Finance September, 2022

‘Buy Now, Pay Later’ (BNPL):The return of layaway or a disruptor for Credit Cards Industry

Long back shopping at almost any U.S. retailer included the option to choose an item you were after and have it stashed away in some back room while you made incremental payments until the purchase price was covered and you could take it home.

Those layaway plans mostly disappeared decades ago as credit cards arose as the go-to option for consumers to cover the cost of goods they couldn’t quite afford in the moment. In-store financing also became a thing for many stores, particularly those offering high-ticket items like furniture and appliances.

Now, a tech-driven option that occupies a sort of middle ground between layaway and in-store financing is on the rise and, like the purchase plans that have come before, it could cost you.

Buy-now-pay-later isn’t a fresh idea, but a growing number of tech platforms are finding success in partnering with retailers to offer portals for issuing credit at time of purchase that allows the consumer to check out, virtually or in-person, with their goodies after agreeing to an instalment plan. Some charge interest, some don’t, and rescheduling a payment or paying late can also come with charges.

India is one of the world’s largest markets when it comes to fintech Innovation and adoption.

Banking as we know of it has been always dynamic and prone to disruption. The advent of technology and ease of regulation have been action as catalyst for steering the Indian banking into new dimension. There are lot of new technology and products are being introduced that has potential to challenge tradition banking and make the age old bankers run for their money. Fintechs,block chain technology, data analytics are few of the new concepts that are in the main stream now. One of the new concepts that has been the talk of the banking arena for some time now and can pose a serious challenge to the bankers in the retails space is ‘Buy Now, Pay Later’ (BNPL) and fintechs are using it to accelerate their growth.

What is Buy Now Pay Later?

BNPL also known as Buy Now Pay Later is a payment option where you can make a purchase without having to pay from your own pocket. Generally, you sign up with a company providing this facility who makes the payment when you make the purchase. Buy Now, Pay Later’ (BNPL) is a type of short-term financing which allows you to pay in instalments by the end of the stipulated time period for making purchases. In India, quite a few online merchants and Fintech companies are offering BNPL facilities to customers as a convenient payment method and an excellent alternative to credit cards. Accessible, transparent, and offering no-cost EMIs, BNPL is all set to change the lending landscape.The rise of BNPL service providers can be accounted for the pandemic. With the increased demand for e-commerce services due to lockdowns and consumers preferring to break down large expenses into smaller interest-free EMIs, BNPL has become a go-to option for many. ‘Buy Now, Pay Later’ has a lot to offer, however, it is still a loan and you need to be careful while looking to avail it. While you can get BNPL approvals easily, failure to make payments on time can hurt your credit score. Hence, just like other loans, you need to ensure that timely repayments are done to maintain a healthy credit score.

It is a powerful tool that supplements consumerism boom, with the aim of providing a digital credit card experience and brings into its fold even those left outside the structured financial system. Developed to cater to the underserved and unserved section of the population and the new generation that’s geared towards instant gratification, Buy Now Pay Later isn’t limited only to that; it is rather open to all, thereby unlocking previously untapped opportunities for consumers, merchants, and fintech companies alike.

What kinds of BNPL exist?

There are two kinds of Buy Now Pay Later options. One is the Interest-free option available to the consumer which is sub-vented by the brand. In this model brands bear the cost, this is because Fintech has enabled a sale for them which otherwise would have not been possible if the consumer did not have an incentive to pay it in instalments at no extra cost.

The second kind of BNPL is where a customer has to pay a nominal amount as interest. The interest is nominal and the total amount is split into smaller instalments, thereby making the purchase more affordable for the consumer.

Why would a customer choose this option?

The zero-cost EMI option is a no-brainer for financially savvy consumers. It allows them to conserve cash and better manage cash outflow.

The interest charged option is best suited for New to Credit customers, who are at the early stages of their earning lifecycle. Perhaps they just entered the workforce, do not have any credit history and their earnings are modest but growing.

They will avail this method from an affordability perspective and also invariably start building a credit history. If they pay back in time this will positively affect their credit score which will set them up for access to other financial products as their incomes and score mature.

A BNPL is most likely the first financial product most millennial or Gen Z will experience. This sets up a stage for responsible lenders and responsible borrowers

How BNPL is different from credit card:

BNPL follows a transparent and low-cost pricing model. It is not mandatory to have a credit history. BNPL services/facilities are provided by select e-retailers and fintech organizations. Interest – free credit period can go up to 48 months. You have to pay the fixed EMI on the scheduled date. Unlike credit card you cannot earn cash back, reward points, airmiles on purchases. The interest rate is up to 24% and is not fixed like credit card , it can vary depending on various factors.

Transparent and low-cost pricing model: BNPL usually follows a transparent and low-cost pricing model because a lot of the offers are subsidised by brands so that the customer gets the best value of the offering. Lizzie Chapman, CEO and Co-founder, Zest Money, says, “Unlike credit cards that are meant to deceive the customer with hidden charges and exorbitant interest rates, BNPL is transparent. The customer knows exactly how much he/she will be paying.”

Completely digital and instant sign up process: Anyone sitting in any part of the country can sign up and avail of the service. Credit Cards on the other hand require weeks and a lot of paperwork. With digital KYC, one can get instantly approved and start transacting.

More accessible: When compared, experts say, credit cards are for high CIBIL customers, people in metros and salaried folks. Only 65 million people in India use credit cards. Chapman of ZestMoney adds, “BNPL by nature is designed for a much bigger market, including new to credit customers or people with insufficient credit history. Most BNPL players use an alternative data and proprietary model to approve these customers. Also, Indians are leapfrogging credit cards to BNPL.”

Who are all eligible?

  1. You must be a resident of India.
  2. You must reside in a major tier 1 or tier 2 city.
  3. You must be aged above 18 years. The maximum age of eligibility in some cases can be up to 55 years.
  4. You must be a salaried individual/professional or businessman.
  5. You must have a bank account and all the KYC documents in place.

What the consumers should watch out for?

Most of the Indian consumers do not give safety and security their topmost priority when it comes to get quick profitability.

For consumers safety should be the first criteria to look forward.While downloading apps, make sure that the app is from a lender who is a licensed lender. If a company is not holding RBI license, it should clearly state under whose license it is offering the product. Before downloading, check who is publishing the app, take a look at the company’s website and make sure it is an established and registered company in India.

In the light of many fake lending apps are being busted by law enforcement agencies, regarding the licence  check if it clearly mentions the same on its website, along with the RBI guidelines that it follows, including the grievance redressal mechanism and the interest rate policy. Moreover, never download apps which ask for contacts as they may be misused for coercion.

The biggest worry is misleading advertisements. Most BNPL options claim no fees or zero interest, but you need to understand what is the real cost of the loan. Even if companies say zero per cent, they are supposed to declare their IRR – Internal Rate of Return, so the consumers, for their own protection, need to make sure that the company or the app is disclosing all of these.


There are companies that use BNPL as payment product where credit reporting does not happen. This kind of an approach creates a gap when evaluating a consumer for other loans and often leads to misinterpretation of the customer’s actual pay burden by other potential lenders, causing the customer to be over leveraged when approved.

It is the lender’s responsibility to ensure proper process is followed before lending credit, which include taking the customer’s data, checking their bank statements, their KYC, getting their PAN number and identification. This helps to establish that the consumer is one who he says they are; then evaluate their credit burden, and lend them an appropriate amount. If fintech players fail to comply, the result can be detrimental to the total credit culture.

When the customer stops paying, the RBI’s prescribed code of conduct for collections needs to be followed. But companies that do not treat BNPL as a credit product may not be following this code of conduct, leading to customer harassment, involvement of third party collection vendors, who may cross the line, due to lack of proper monitoring.

There are quite a few red flags that can be ironed out with a proper regulation and plugging the loop holes in the system.

Future of BNPL:

According to Goldman Sachs, the Indian e-commerce industry is poised to become a $99-billion market by 2024, driven by consumer demand. At the same time, industry experts say, BNPL will become the fastest growing online payment method, from a 3 per cent share in 2020 to 9 per cent in 2024.A Q4 2020 BNPL survey predicted that BNPL would grow by 65.5 per cent in India, reaching a value of $11,570.7 million in 2021. The adoption of this payment mode is expected to rise at a 24.2 per cent CAGR from 2021 to 2028, taking the gross merchandise value of BNPL in India to $52,827.2 million by 2028, from $6,990.5 million in 2020.Consumer demand for e-commerce services increased due to the lockdowns. BNPL helped customers break down large expenses into smaller, interest-free EMIs, rather than having to dig deep into their wallets. BNPL not only eased purchases of daily essentials but even brought aspirational products within reach.Due to low credit card penetration in India, supplemented by traditionally strict eligibility criteria to avail formal finance, there exists a sizable under-served population with little or no credit histories. This situation perpetuates a cycle wherein people seeking formal credit are turned down due to unavailable or inadequate credit scores. With BNPL relying on alternative data sources for underwriting, new-to-credit customers are integrated into the country’s formal financial ecosystem.

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