India’s digital lending market is expected to reach $100 billion by 2023, posting a CAGR of 36%. The digital lending space in India has 330 startups. Digital payments saw a steep rise because of social and economic factors brought about by the COVID-19 pandemic—this is reflected in UPI hitting 1.34 billion transactions in June 2020.
Consumption has been the bulwark of growth in recent years. Over the past few years, households in India have dipped their savings and leveraged themselves to finance consumption. The year 2020 brought this changing habit to the mainstream, with the pandemic impacting financial stability and continuity.
The growing importance and penetration of non-banking financial companies (NBFCs) are helping fund retail credit demand. However, post the NBFC credit crunch, credit has become a tad inaccessible to riskier customer profiles, somewhat constraining households’ ability to spend.
This reduction in spending capacity pushes lending companies to innovate and introduce new products to retail consumers. ‘Buy Now, Pay Later’ (BNPL) is an ingenious product that aims to take formal microlending in an informal way to retail customers, especially to the segment that does not get easy credit from banks.
‘Buy Now, Pay Later’
BNPL is a zero-interest, short-term micro-credit for online purchases such as food, clothing, and travel. It is a digital credit payment offered by online providers, which allows a consumer to make a purchase and either delay the payment by 14–30 days or slice the payment into smaller chunks that can be repaid over several installments (may not be structured loans).
BNPL is a credit amount given to a user for a certain number of days, without processing fees or interest rates. This credit enables the user to pay upfront for their purchases, without any deduction from their bank account. It offers them the convenience to pay with all their purchases together. A BNPL solution provider either charges an interest rate or fixed rate if the user cannot pay the credit amount within a specified number of days or provides easy equated monthly installment (EMI) options.
A BNPL provider extends credits to a consumer with only e-KYC and some credit health checks in the background. The instant credit decision is supported by alternative credit scoring based on the consumer's digital data, such as alternative data, mobile data, purchase data, and location data. RBI guidelines allow approved entities to disburse loans of up to INR 60,000 in a year to individuals registered through the Aadhaar OTP-based KYC process. Various FinTechs have leveraged these guidelines to extend innovative BNPL offerings to customers outside the structured credit basket. This segment of urban and semi-urban consumers has a weak or no credit history/score (ineligible for structured personal loans), lacks financial documents, and does not have significant ticket credit requirements.
BNPL Products Are Offered by FinTechs, NBFCs, Banks, and Merchants
FinTechs that offer their BNPL products directly to customers, e.g., Simpl and LazyPay, ensure customer relationship and provide partner merchants’ lists to use their products.
NBFCs/banks offer BNPL products but only partner with merchants offering a complete infrastructure in the background, e.g., Capital Float (mostly utilized by e-marketplaces such as Amazon).
Marketplaces or ‘hypermerchants’ such as Amazon and Flipkart offer BNPL in partnership with banks or other lending institutions.
Growing ‘Buy Now, Pay Later’ Segment in India
According to Coherent Market Insights, the global ‘buy now, pay later’ platforms market is expected to reach $12,969.0 million by 2022, expanding at a CAGR of 21.2%. While North America will hold the largest market share for BNPL platforms, Asia-Pacific is expected to be the fastest-growing region.
Pay later, cardless EMI, and EMI have become the preferred payment modes. These modes registered a growth of 290%, 178%, and 125%, respectively, owing to stress in income across households, claims Razorpay.
Digital lending—through its microlending feature—has been the most successful in penetrating an untapped customer base of over 300 million Indians who have remained outside the formal credit market.
BNPL is one such bite-size, micro-loan product that has well leveraged UPI stack and Aadhaar infrastructure to cater to this segment of e-commerce consumers.
BNPL addresses small-size finance gaps for meeting the cost of living under various essential segments.
A newly created financial crunch and the switch to digital payments in 2020 are likely to push more consumers toward BNPL purchases. Simpl, a leading FinTech with an innovative BNPL product, registered a 40% increase in essentials purchases at ‘hyperlocal’ merchants and a 40%–45% rise in medicine purchases in the first few months of the lockdown period in India.
The use and demand for BNPL products saw a steep rise in 2020 because of the pandemic—offline-friendly consumers switched to online purchasing and digital payments.
Why Is BNPL Becoming a Preference?
‘Instant availability’ of monthly installment plans and ‘zero-interest deferred payment’ drive customers, especially those in the 22–44 age group, to BNPL.
BNPL offers more flexibility than old EMI schemes, as well as a credit card-like interest-free revolving credit period without the hassle of a not-so-transparent credit card process.
Benefits for Customers
- Flexibility: With the flexibility of BNPL payment options, customers do not have to wait until there is money in their bank account and they need not use their credit card.
- Zero Interest: There are minimal or no charges if customers repay within the interest-free period.
- Better Budget Management With Single Payment: Instead of multiple payments with every purchase, customers can make a payment in one go for all the purchases made during a period—mostly a fixed date in a month.
- Added Layer of Security: Customers do not provide their bank or credit card details to various merchants. Only KYC details are shared in a secure environment with a BNPL provider.
- Simple Sign-up and Almost Instant Assessment: The process is much simpler and quicker than getting a credit card.
Benefits for Merchants
- Increased conversion or reduced number of abandoned carts is the biggest benefit of BNPL for online merchants.
- Increased basket size or average transaction value, as high amount purchases can be made with no interest EMI options.
- Easy integration of technology is possible as heavy BNPL products (mostly provided by FinTechs) are integrated with merchant systems and ready plug-ins.
- There is better customer retention during the payback period and the likelihood of new or repeat sales.
- Benefits of analytics can be availed even by medium-size merchants, without much investments.
Benefits for BNPL Providers
BNPL lending products are offered by FinTechs, NBFCs, banks, and merchants with financial arms. These BNPL providers get direct and indirect benefits from these products.
- New Customer Base: A digital-only bank finds it challenging to get a continuous customer base for credit. A BNPL product instantly increases its credit customer base through a partner merchant’s existing and potential customers.
- Reduced Customer Acquisition Costs: FinTechs, digital banks, and NBFCs save on their marketing and customer acquisition efforts and costs by partnering with large merchants to offer BNPL as microlending.
- Automation-Friendly: Low credit transaction amount and one category of use (purchase of a product or service) help automate repetitive processes, including underwriting. Machine learning can be leveraged in BNPL transactions. It can be offered as a white label Infrastructure-as-a-Service (IaaS) to merchants.
- Ease of Implementation: Merchants’ platforms need to undergo minimum changes to include a new payment method, as complete technology solutions of BNPL are designed outside merchant platforms and offered via open APIs or platforms.
- Data for Analytics: The ‘missing’ data beyond merchant category code (MCC) in typical credit card transactions can be captured well through itemized BNPL offers/approvals. This data is useful for banks in areas such as cross-selling, marketing, and fraud detection.
Any consolidated data exchange agreements would prove beneficial for both online and in-store branch merchants for the ‘rack position’ of various selling items.
Risks and Additional Costs Associated for All Parties
Benefits of BNPL also bring in some amount of risks and costs. There is a higher probability of misuse of this credit product by consumers.
A number of BNPL providers do not check an individual’s ability to pay back the borrowed money. This leads to a higher number of potential defaulters than structured personal loan defaulters, which is reflected in an increased number of bad loans with NBFCs and tech BNPL providers.
Besides, the transaction fee paid by merchants to access a BNPL service is higher than the transaction fee on traditional payment methods.
Lastly, customers end up paying late fees on BNPL purchases, as they are unable to keep up with their payments or forget to pay. Interest-free periods vary for various BNPL providers and missing repayments attracts late fees.
BNPL FinTech and Non-FinTech Solutions
FinTechs have been paving the way to offer innovative BNPL products in India, with Simpl and LazyPay leading the others. However, large ticket online merchants, marketplaces, NBFCs, and banks are collaborating significantly to create a hi-tech ecosystem.
Simpl and LazyPay are two of the most popular pay later services catching up in India.
Outlook for Market in 2020 and Beyond
Household liabilities and managing the cost of living will become top priorities for consumers in India and the world. BNPL seems to be a suitable and innovative product that handles these priorities.
CIBIL TransUnion 2020 survey suggests a decline in approval rates for personal loans. However, the Y-o-Y 2020 forecast for demand suggests a positive 15.1% growth. Demand for products such as personal loans, thereby the demand for BNPL, will remain moderate as consumers look to secure funds to bridge any personal finance gap.
Payment banks looking to expand banking services on their license can get an excellent playing field in the form of BNPL innovative services.
Payment gateway providers and BNPL service providers can leverage partnership opportunities to create APIs and plug-ins for merchants.
As repayment priorities of structured loans will continue to leave a cash crunch for other household expenses, BNPL products will be preferred to provide greater credit access via digital channels.
Lifestyle purchases by consumers may continue to get postponed. However, core expenses such as education, smartphones (a result of increased online education), healthcare, FMCG, travel, and apparel will continue to be priority purchases using BNPL.
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