Buy Now Pay Later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them at a future date, often interest-free. There is a huge gap in credit demand & supply and access to credit has been particularly challenging, especially for youth and new-to-credit customers. Also due to restrictions on the issuance of credit cards by some large banks and payment networks —‘buy now pay later’ is becoming a preferred mode of payment for e-commerce transactions.
“He who is quick to borrow, is slow to pay.” – German Proverbs
In India, digital lending is one of the fastest-growing fintech segments. It grew exponentially from a volume of $9 billion in 2012 to nearly $110 billion in 2019. It is further expected that the digital lending market would reach a value of around $350 billion by 2023.
As a part of the digital landing, no wonder, BNPL is bound to experience a massive surge in the coming years. According to a report released by management consulting firm RedSeer, the fintech subsegment is moving at a 65% year-on-year growth. In India Buy Now Pay Later market is estimated at $3-3.5 billion today but could potentially grow to $45-50 billion by 2026. The firm also estimates that the number of BNPL users in the country may touch 80-100 million by 2026 from the 10-15 million estimated currently.
A New Breed
Fintechs have been disrupting consumer lending in ways that private banks usually stayed away from. Traditionally consumer loans are largely focused on three use cases – personal loans, home loans, and salary overdrafts – offered by banks. A new breed of fintech-based lenders is now taking this a step further by offering credit for small-ticket purchases like online grocery and food delivery, and other e-commerce categories. The new emerging credit product offered by fintech such as Simpl, LazyPay, Uni, PostPe, and others are now seeing increasing demand from millennial and Gen Z users.
The Buy Now Pay Later model is structured similar to existing check-out financing options like debit and credit card-based EMIs, but with a larger focus on smaller ticket purchases. Debit- and credit card-based EMI usually have an average transaction size anywhere around `10,000-30,000, but BNPL loans have an average transaction size of just around `300-600 with zero interest charges. The repayment cycle for BNPL is usually between 15-30 days, compared with 3-12 months in EMI products.
BNPL providers usually acquire customers very early in their credit journey which means that they are typically new to the banking system. Hence, their creditworthiness is hard to determine due to a lack of credit scores. This is where fintechs have an upper hand over banks, thanks to their ability to model alternative credit scores using transactional data acquired from online merchants, and user data acquired directly from smartphones and users’ social media profiles.
For users, BNPL solves the problem of affordability, and for merchants, it allows for better checkout rates, and a superior buying payment compared to other methods. Online platforms offer BNPL checkout directly on their payment page, which allows users to authenticate transactions faster with a single click compared to the tedious two-fact authentication process in credit/debit cards and UPI.
Now with Physical Card
According to a report by Goldman Sachs, the Buy Now Pay Later market in India is poised for massive growth in the next 5 years and it currently forms 2 percent of total retail GMV and is expected to surge to nearly 7 percent by end of FY 26. To propel this growth trajectory, leading players like Uni, slice & LazyPay have gone a step ahead, tied up with banks and introduced physical cards to increase touchpoints and attract a wider user base. These pay later players are bringing the lost sheen of cards and are making it trendy again. The attractiveness, design and unboxing experience, the promise of instant onboarding and fast physical card delivery make them stand out.
Additionally, pay later cards are also supported by a highly engaging app that enables users with insights into their monthly spending, offers a smooth interface, and assured cashback making them a hot favorite among new-age users. Take for instance Uni’s Pay 1/3rd card, it automatically splits every transaction into 1/3rd allowing consumers to pay their monthly spending in 3 parts over 3 months for no extra charges. Uni Pay 1/3rd runs on a Visa network and hence is accepted across millions of merchants including offline retail stores. Uni users love the physical card so much that an average of 52 percent of them use the card at offline retail stores.
“BNPL was always viewed to be an online-only product, thereby restricting the touchpoints for the users. Uni’s zero-fee Visa-powered card is one of the many ways to make Pay 1/3rd card a lifestyle choice. Currently, BNPL in India is ripe for explosion, and pay later physical cards will give an impetus to its massive adoption in India,” said Nitin Gupta Founder & CEO of Uni.
BNPL providers make money charging a 2-3% commission from merchants for each transaction which allows these credit providers to offer zero interest on transactions. However, experts indicate that the very convenience factor of BNPL creates a high risk for the lenders in the long term. Similarly, if you are taking care of the following points then Buy Now Pay Later, which seems like a boon becomes a curse and creates a lot of trouble.
EMI Schedule: EMIs are free for a few months (even some time for 15 days), if one pays the due amount within this time frame then it is going to be without any interest but on exceeding this period one will be charged interest.
Precaution: Users need to be punctual in the payments of these EMIs as defaulting would hamper their credit score.
Boost to Credit Score: For a better credit limit one needs to have a better credit score, but companies do provide this facility to people with poor credit scores as well. With gradual usage, your credit limit is increased. BNPL can also be used to improve your credit rating as paying your EMIs regularly will win you a better score, especially for the people who have defaulted in the past repaying their loans and credit card bills.
Charges: BNPL providers may not charge any interest if the payments or EMIs are paid on time but if not, an interest charged is levied; which is in most cases more than the interest charged by personal loans. None of these companies have an annual fee and only a few have a joining fee.
Should You opt for BNPL?
“This would be a much better world if more married couples were as deeply in love as they are in debt.” – Earl Wilson
Buy Now Pay Later is only for those who are confident of repayments in accordance with the norms of the company. Failure to do so will attract penalty charges, which could exceed expectations. As already mentioned, a non-payment could potentially ruin the credit score of an individual thereby making it difficult for them to apply for future lending opportunities.
BNPL is ideal for those under the following circumstances:
-Borrowers with a certain salary or income from a fixed source.
-Businessmen who are short of liquidity.
-Those who wish to improve their credit scores.
-Those who want to use it as a cashless tool for hassle-free transactions and then pay the service provider in full.
Remember, BNPL is finally a loan. If the loan is not dealt carefully then it can create a debt trap for you. So BNPL is not at all recommended for people who are not certain about their income and those who do not see any regular flow of money in the coming future. (Content credit to Forbes and Financial Express).