The signals for the need to rethink the lending landscape were already there – the lagging credit penetration in India, the surging adoption of eCommerce (set to touch the $99 Billion mark in three years), and the growing appetite for digital payments.
Then COVID-19 hit, and the lockdown became the straw that broke the camel’s back and remade it. In its aftermath, financial stability plummeted, creating the perfect storm for Buy Now, Pay Later (BNPL).
Understanding BNPL: A Force of Change
BNPL is a short-term, micro-credit model that enables convenient and flexible payment for online purchases. A provider offers credit to users, allowing them to buy a product/s or service without any deduction from their bank accounts. The customer either pays the due amount in full after a set grace period (15 to 45 days) or splits it into pocket-friendly instalments.
What makes BNPL different, besides speed and the fact that it is lending at point of sale (PoS), is nil (or low) interest. It also doesn’t have other fees (convenience, processing, etc.) typically attached to conventional credit options.
Whether the BNPL provider charges interest or not depends upon the credit limit and tenure. Generally, for less than INR 25,000 credit, there is zero interest. These BNPL models serve small-ticket purchases like apparel and food. The goal here is consumer convenience.
For higher ticket purchases, the credit limit ranges from INR 25,000 to INR 1,00,000. The primary objective here is fulfilling the user’s credit requirement. The repayment cycle ranges from 30 to 90 days, and the payments are interest-based EMIs.
Compared to the former, the latter poses fewer risks to the BNPL service provider since the credit is underwritten. To further mitigate the probability of defaults, a fixed fee or interest is levied if the user is unable to pay the credit at a specified time.
Answering Consumer Needs: Convenience Is King
Buy now, pay later is not a new concept. Most people have experienced it at some point. The simplest example is paying the milkman at month-end or taking groceries home from a Kirana store on credit. The difference is the medium and increased appetite in consumers. The solution is now digital, causing an explosion of opportunities.
For people who historically have been unable to get credit through traditional routes easily, BNPL is the simplest way to access formal credit. From first-time workers to people employed in the unorganised sectors, it is a potent tool for this finance-starved segment.
The ability to pay later at PoS lets them afford everyday items without the burden of the additional costs. That’s why the option has seen deeper penetration in Tier-II cities and beyond.
Reshaping The Face Of Credit In India
The advantages of Buy Now, Pay Later to consumers are plain as day. It is, however, the change it has triggered in credit in India that is noteworthy. It provides immediate financing through e-KYC and alternate sources of data like purchase history, mobile data, and other digital information, allowing the provider to evaluate creditworthiness.
Even traditional banks have realised that partnering with fintechs that enable Buy Now, Pay Late is the way forward. Instead of eating into the revenue earned from loans and credit cards, BNPL bolsters it by attracting a new set of customers.ICICI, in collaboration with a Fintech firm, now offers a Pay Later option to retail customers through its app, cards and internet banking. It’s a no-cost loan product with reduced paperwork that divides payments into easy monthly instalments.
Axis Bank offers the facility through their digital payment app, Freecharge. Currently, Freecharge Pay Later is an invite-only product available to eligible customers. HDFC provides FlexiPay as part of their BNPL offering: a zero-interest credit available at a number of merchants’ PoS.
Revolutionising The Lending Landscape
Moving beyond banks, BNPL empowers credit within the supply chain of any business, from food delivery firms to travel companies. A perfect example is Ola Postpaid, which comes with a Pay Later option. Besides paying for all the cab rides once every 15 days, customers can use BNPL with more than 300 Ola brand partners.
For goliaths like Amazon and Flipkart, who offer Pay Later either through a tie-up with a Fintech or subsidiary, it is both a revenue stream and a way to help sellers. Because of the micro-credit services, consumer spending on both platforms have been eye watering.
According to Flipkart, during The Big Billion Days 2020, Pay Later customers clocked 7x higher spending and EMIs showed 1.7x higher adoption during. Since BNPL increases the consumer’s capacity to spend, it also revitalises sales. For SMEs, who were battered by the pandemic, it can become a sorely needed lifeline.
Considerations For Lenders: A No-brainer
As beneficial as BNPL is for the entire ecosystem, lending service providers (LSP) must step forward astutely. It should be their responsibility to make the users aware of the fine print in any BNPL scheme. This transparency is key to giving consumers peace of mind and ultimately helps the LSP by gaining customer loyalty.
Another consideration is regulating the fast-growing niche to prevent a spiral of bad debts. To do this, LSPs need to create a healthy and responsible lending market. Technologies that can adequately assess the risk of credit takers through underwriting are essential.
Besides using risk scorecards, identifying the intent to defraud is equally vital. Why? Because the capacity of a consumer to pay back is unlikely to alter within 15 to 30 days (the tenure of BNPL). Therefore, it is the intent to deceive that matters more, making evaluating it a no-brainer.
Propelling BNPL Further
The Global Payment Report posits that Buy Now, Pay Later will be the fastest growing e-commerce online payment method in India. The propeller for this is the adoption in lower-tier cities, where getting formal credit has been a perpetual challenge.
At present, we predominantly see BNPL on eCommerce platforms. One reason is convenience. Another is that it’s offered right at the checkpoint. This lends it a sheen of digital payment rather than buying on credit – a preference that most Indians are still not comfortable with. Finally, it gives credit-averse consumers the flexibility to manage their finances.
But given time and done right, a BNPL solution can be an excellent business model for any company. Take, for instance, Dell Financial Services, which extends flexible payment solutions to enterprises and no-interest business credit to SMEs to help them purchase laptops, desktops, etc.
BNPL also has the potential to create “super apps” like Ant Group that provide not just shopping, payments, and financing but also other banking products through a single platform. The caveat is finding an embedded finance service provider that allows you to offer BNPL at speed and with security to customers conveniently.