What is Buy Now, Pay Later?
Buy Now Pay Later or BNPL as it is commonly known is a financing option that allows you to purchase a product or benefit from a service without having to worry about paying for it immediately. It is simply a short-term loan product where the BNPL lender pays the merchant or service provider at the point of sale and allows you to repay the loan at a later date with little or no interest charges. . Reimbursement can be either lump sum or in the form of equivalent monthly payments (EMI).
How is it different from paying by credit card?
Credit cards and BNPL are similar in that they both offer deferred repayment options to the borrower. However, there are some key differences between these two credit products. First and foremost, ease of access. Although using a credit card requires a good credit history and involves a rigorous verification process, BNPL offers hassle-free access to credit. You can simply purchase a product from an e-commerce portal or pay your utility bills by choosing the BNPL option at the point of payment.
Not only access and convenience, credit cards and BNPL also differ in other aspects. For example, credit cards usually offer interest-free credit periods of up to 45 days, while BNPL often offers interest-free loans with a shorter credit period, say 15 days to a month. Credit cards come with fees such as membership fees, recurring annual fees, etc., which may be higher for premium cards. On the other hand, BNPL has no such fees.
What is the prevalence of BNPL as a payment method in India?
The BNPL market is booming in India. Thanks to the rise of e-commerce and digital payments, the low penetration of credit cards and the rapid increase in the number of fintechs that are disrupting traditional methods of accessing credit. Ease of access to credit has made BNPL the preferred product for GenZ consumers, young millennials, new credit borrowers, who were often underserved or overlooked by traditional banks.
According to RazorPay’s The Covid Era of Rising Fintech report, the Indian BNPL market grew by more than 637% in 2021, which is higher than the 569% growth recorded in 2020. Indian consultancy Redseer estimates that the BNPL market is expected to grow from $3-3.5 billion currently to $45-50 billion by 2026.
There are dozen of BNPL players in India including ZestMoney, LazyPay, MobiKwik, Paytm Postpaid, Amazon Pay Later, Flipkart Pay Later, Capital Float among others. Even traditional banks are jumping on the BNPL bandwagon. This includes FlexiPay from HDFC Bank and ICICI PayLater from ICICI Bank. Axis Bank also bought Freecharge from e-commerce company Snapdeal.
Why do purists worry?
Because they fear that such easy access to credit, which is primarily for discretionary purchases, will lead borrowers into a debt trap. Although small in size, obtaining multiple loans from different lenders at the same time will impact the repayment capacity of the borrower and it affects the credit culture. Since these are primarily focused on new borrowers with no credit history, lenders also run the risk of having higher non-performing assets (NPAs) if borrowers default. Even the credit bureaus say the BNPL is still in its infancy and the reporting mechanism is not as structured and foolproof as it is with credit cards.
What are the regulatory issues with that?
Regulators around the world are cracking down on the buy-it-now-pay-later industry amid concerns over excessive and unregulated lending, lack of credit history, customer data privacy and the boom illegal loans, among other problems. Australia, Canada, Denmark, Ireland, the Netherlands, South Africa, the United Kingdom and the United States have adopted a codified definition of specific categories of short-term consumer credit and high cost provided by BNPL lenders.
Also in India, the Reserve Bank of India is keeping a close eye on digital lenders. Last November, a task force set up by the RBI found that 600 out of 1,100 loan apps on Indian app stores were illegal. The report focused on improving customer protection and securing the digital lending ecosystem. Some of the key suggestions in the task force report include subjecting digital lending applications to a verification process by a nodal agency and setting up a self-regulatory body (SRO). The task force also recommended treating buy-it-now, pay-later (BNPL) agreements as on-balance sheet loans. This in turn may require knowing your customer (KYC) and verifying your credit score before extending BNPL options to borrowers.
February 07, 2022