Banking Article, Banking Finance 2023, Banking Finance January 2023

BUY NOW PAY LATER (BNPL) – Rewriting the future of lending

Oh guess! Something you want now and will pay for it later. A new credit model is taking shape in the country, a simple small ticket loan that is for online and sometimes offline purchases with the click of a button. I’m talking about the rise of the Buy Now Pay Later.

The convenience of paying later is a new phenomenon in the digital world in reality but in India it’s been happening for a lot of time. Remember those the old “Bahii Khata” systems that we had in local kirana stores where regular customers could go ahead keep buying the daily provisions and pay later at some point. This BNPL system is not much different except that this “Bahi Khata” has now moved online. Signing up on BNPL is extremely easy. The loan does not come with a hefty price tag in fact no interest in most cases. It’s digital it’s convenient enables instant gratification with attractive user interface and that’s what millennial and Gen Z like. BNPL is a short term financing service which is sold as a product and that allows customers to spread their payments for a purchase usually without any interest cost. of course there’s always a catch so buy now pay later company will tie up with E commerce players like Amazon or Flipkart, food companies like Swiggy and Zomato etc. or even travel companies like Make My Trip etc, and then it will allow customers to buy immediately and definitely payments by a few months or up to few days depending on what you want.

It’s a vicious circle – without enough credit, users can’t build up their credit score and without enough credit scores, getting loans becomes a challenge. The first thing that comes to mind when we talk about a credit card is hidden charges everybody is scared of those and zero interest rate policy. The reason why credit cards are so underpenetrated is because for credit cards we require a credit history. That’s not a lot of Indians have and that’s where buy now pay later comes in because even without a credit history you can still enter in that pool means  you don’t need any credit history for that.

Covid-19 has brought in a paradigm shift in India’s digital payments landscape. Therefore, consumers look for financial services that offer ease and affordability but often due to high interest rates, fees and hidden charges levied on credit cards, people refrain using it. However, the BNPL model works in a similar way with low or no interest rates. It finances smaller ticket items and allows consumers to buy the essentials and pay at a later date.

Shift from a Traditional Banks towards BNPL Model

While India has handful of players in this segment, to capture the industry further. Traditional banks such as ICICI Bank (ICICI PayLater) and HDFC Bank (FlexiPay) have also stepped into the competitive BNPL space. Buy now pay later (BNPL) is an emerging lending tech sector in India with the presence of several startups and fin-tech. Many BNPL startups such as Simpl, Lazypay, Zestmoney, ePayLater, ecommerce marketplaces Flipkart and Amazon India also offer their own BNPL products, while even fintech and payments companies such as PhonePe (via Flipkart) and Paytm have ventured into this territory. Indian ride-hailing aggregator Ola also recognized the potential of BNPL and started offering Ola Postpaid, which also offers a pay-later option for 300+ third-party platforms, besides Ola itself.

While startups have led the adoption charge, traditional banks have held back from venturing into BNPL due to the fear of cannibalizing their lucrative credit card business. It is only lately that banks have realized that credit cards and BNPL can coexist and complement each other. Banks are using BNPL to attract a new set of customers that have so far stayed away from credit cards. For instance, ICICI Bank partnered with payments giant Pine Labs to offer in-store pay-later facilities to retail consumers. This allows consumers to make high-value purchases with payments split over monthly installments (EMI). Besides offering a no-cost loan product, it eases on boarding by reducing documentation.

E-commerce is gaining momentum in India with consumer and retail business adoption at an all-time high. Many companies are trying to increase and maintain a strong foothold in Tier 2 and Ties 3 cities due to the rise in demand from these markets, they are also aiming to expand their horizons in metro Cities and Tier 1 markets to cater to the rising disposable income in these regions. Over the past couple of years, there has been a major uptick in the number of online shoppers in Tier 2 and 3 cities due to improving internet penetration, increasing awareness about ecommerce and adoption of cashless payments. The success of BNPL in the Indian context can be attributed to the fact that it offers formal micro-lending in an informal way, without putting customers through the cumbersome formalities of loan processes of traditional banks.

BNPL – a new concept

BNPLs are small-ticket loans that allow online and offline purchases, when it comes to making instant payments mostly via apps that function like a Paytm or a PhonePe. This short-term financing option allows consumers to buy products and then pay for them during a stipulated period. They can either pay for the purchases in a lump sum amount or through no-cost EMIs. The core tenet is that it enables the borrowers to afford what is to be bought today but pay for it over time.

These loans typically require an upfront deposit payment representing a portion of the purchase amount. After that, the remaining balance must be paid off in installments over a few weeks or a few months depending on their financial health. So the interest-free period may vary from 15 to 30 days, beyond which the customer can repay in a single shot or in EMIs spread over 1-12 months. The primary driver behind the rise of the BNPL segment in India is higher purchasing power and informal nature of accessing credit that it facilitates.

In terms of cost, buy now, pay later plans usually don’t charge any interest or fees, but if a buyer fails to pay the amount within the defined repayment tenure, the Buy Now Pay Later facility provider will charge interest on the amount. Also this payment delays will impact the buyer’s credit score.

Enablers for BNPL

Several startups such as LazyPay, Simpl, ZestMoney, and ePayLater, Felxmoney operating in this space have, essentially, changed the way credit works in India. Paytm’s Postpaid also allows users to shop online and clear the balance next month. Amazon launched its Pay Later option in 2020 but customers can only sign up through the mobile application. Flipkart also rolled out a similar option last year which offers repayment tenure of up to 35 days. Users can also make partial repayment of bills. Recently, BharatPe, one of India’s fastest growing fintech companies, also forayed into this segment with the launch of ‘POSTPE’. Apart from these, traditional banks have also forayed into the segment such as HDFC Bank’s FlexiPay and ICICI Bank’s ICICI PayLater offerings.

The biggest USP of BNPL is that it caters to young or new-to-credit consumers in India who do not have credit cards. Millennial and Gen Z who do not have any credit history but are looking for short-term credit are eagerly adopting this model. The pandemic induced lockdown, job losses, salary cuts, and uncertain income have helped in BNPL gaining momentum in India. Its market share in the e-commerce space is expected to grow rapidly.

BNPL- Is it better than a credit card?

The biggest benefit of BNPL products is convenience. One need to download the app, sign-in, check the spending limit and start shopping. The customer is required to complete a basic KYC process and the credit amount is instantly made available. For a BNPL, anyone over the age of 18 has to complete the e-KYC procedure, following which partner lenders approve the loan. But it is the lender’s responsibility to ensure due 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.

For credit cards, banks link eligibility with your annual income and credit score. Technically, you can apply for a credit card only if you have an income above a certain threshold limit but since BNPLs are small-sized-loans, it is easier to get one.

BNPL schemes (or any loans) are usually more transparent. You pay the EMIs and that’s it. Millennials don’t prefer high-interest rates, fees and low transparency. Credit cards hence are not a good fit for those who are relatively new to credit and are at risk of getting stuck in a debt trap. Pay-later options are usually interest-free, transparent, and a one-tap checkout experience. Most ‘pay-later’ products are absolutely free for consumers who pay on time, which is why it is so popular with users who are looking for a seamless experience when they buy online. Credit cards usually come with an interest-free credit period of up to 45 days.

Many credit cards come with added costs like joining fees, and annual fees but BNPL options don’t have such riders and do not charge a processing fee for joining. However, BNPL providers do levy additional charges such as late payment fee and pre-closure charges.

Credit cards are universally accepted, but usage of BNPL is limited to partnering merchants, though the service providers are regularly increasing the number of partners. You also get plenty of rewards, such as cash back, air miles, and facilities such as special discounts, airport lounge accesses, complimentary travel insurance, etc with credit cards, while BNPL is limited to just shopping.

The future of BNPL can be very bright as the concept will attract more customers to purchase an item of their choice instantly. Most of the providers who provide this facility offer repayment at no cost EMIs which in future is may become the preferred payment option especially among the youth.

However, within its core it is a still a type of loan which in the end the customer has to repay. The lenders offering this service will have to be careful in offering this facility as not everyone will be capable of repaying the amount within the stipulated time period. The customers will have to understand the failure to repay the amount on time to avoid interest and drop in credit score. The future of BNPL looks good provided the customers are able to use the facility properly and clear the amount on time.

BNPL is a good option for those who do not have any credit history but are looking for short-term credit, and quick access to credit without hefty paperwork and documentation. But while these payment plans with no interest free sound enticing, be sure to read the fine print and understand what happens if you miss the payment.

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