Over the past few years, the Buy Now Pay Later (BNPL) has become a prominent financing form. In India, the demand for BNPL has been growing for about 2-3 years, further accelerated by COVID-19. BNPL has emerged as a more convenient payment method essentially decreasing the financial burden on borrowers by offering no-cost EMIs.
According to Goldman Sachs, the Indian e-commerce industry is poised to become a $99-billion market by 2024, driven by consumer demand. At the same time, industry experts say, BNPL will become the fastest growing online payment method, from a 3 per cent share in 2020 to 9 per cent in 2024.
A Q4 2020 BNPL survey predicted that BNPL would grow by 65.5 per cent in India, reaching a value of $11,570.7 million in 2021. The adoption of this payment mode is expected to rise at a 24.2 per cent CAGR from 2021 to 2028, taking the gross merchandise value of BNPL in India to $52,827.2 million by 2028, from $6,990.5 million in 2020.
BNPL boosts conversion rates and average order values (AOV) for merchants by lowering shoppers’ purchase hesitation. It is expected to continue to rise in popularity as a payment method with benefits for all players. For instance, Flipkart recently expanded its Flipkart Pay Later services to make credit available not just on the platform but also on other partner channels, similar to other BNPL service providers Paytm Postpaid and Amazon Pay.
How do BNPL offerings work?
The core tenet of BNPL service is that it enables one to pay overtime – but afford what to buy, today. The credit period for BNPL services ranges from 30 days to 36 months, depending on the transaction size. Similarly, the credit amount also depends on the lender – for instance, while Flipkart offers a seamless checkout process for up to Rs 10,000, under their BNPL services, ZestMoney, another BNPL lender, offers up to a personalised limit of Rs 60,000.
Gaurav Hinduja, Co-Founder and MD, Capital Float, says, “BNPL is growing in popularity because it delivers a seamless shopping experience to customers. As a 100 per cent digital solution, BNPL facilitates a speedy one-click checkout process.” To avail of the BNPL services, the buyer needs to sign-up once at checkout and can proceed to use the solution when shopping across various brands and merchant websites. BNPL is usually low cost or no cost financing with a flexible repayment schedule.
How is BNPL different from credit cards?
The main feature of the ‘Buy now pay later is it is a one-click credit facility service available on checkout on merchant apps and websites. With BNPL, one can avail of this short-term credit option to make instant purchases and pay for them at a later date.
Here is how BNPL differs from credit cards:
Transparent and low-cost pricing model: BNPL usually follows a transparent and low-cost pricing model because a lot of the offers are subsidised by brands so that the customer gets the best value of the offering. Lizzie Chapman, CEO and Co-founder, ZestMoney, says, “Unlike credit cards that are meant to deceive the customer with hidden charges and exorbitant interest rates, BNPL is transparent. The customer knows exactly how much he/she will be paying.”
Completely digital and instant sign up process: Anyone sitting in any part of the country can sign up and avail of the service. Credit Cards on the other hand require weeks and a lot of paperwork. With digital KYC, one can get instantly approved and start transacting.
More accessible: When compared, experts say, credit cards are for high CIBIL customers, people in metros and salaried folks. Only 30 million people in India use credit cards. Chapman of ZestMoney adds, “BNPL by nature is designed for a much bigger market, including new to credit customers or people with insufficient credit history. Most BNPL players use an alternative data and proprietary model to approve these customers. Also, Indians are leapfrogging credit cards to BNPL.”
Higher interest rate – Credit Cards or BNPL providers
It’s a well-known fact that credit cards are the most expensive form of credit. Interest rates on missed payments can go up to 48 per cent, whereas BNPL companies charge around 0 to 24 per cent interest rate depending on the merchant, tenure and the borrower.
Why are BNPL services gaining more attraction as compared to Credit cards? Why do youngsters find BNPL attractive?
Nitya Sharma, CEO and Co-Founder, Simpl, says, “Indian consumers, like all consumers, seek trust and transparency in their transactions – something that is in huge deficit when it comes to traditional credit cards. There is a clear reluctance in consumers towards using credit cards and the biggest source of the disinclination comes from the ‘hidden charges’ or the various transaction fees a credit card company charges its customers.”
He further adds, “Annual maintenance fee, cash advance fee, surcharges on petrol, and GST charges are just some of the extra costs a user incurs for using a credit card. Paying at the time of delivery builds trust in the transaction and cash on delivery is a true 1-click checkout and this is what BNPL services offer consumers.”
The BNPL service is completely digital, online and instant. It is easier, quicker to apply and get approvals. There is no need for an agent to come over for paperwork.
Hinduja of Capital Float says, “The merits of BNPL such as easy registration, the convenience of use and quick check-out, speak directly to the digital-savvy, card-averse customers who demand speedy and convenient small credit at their fingertips. Millennials use BNPL not only to buy essentials but also to fulfil their aspirations, such as pursuing an upskilling course or travelling to a dream destination.”
The Red Flag
Even with all the benefits and attractive features, industry experts say customers should be careful while availing of the buy now pay later service.
Though it differs from one lender to another, late fees or penalties as one-time fees are charged, which are usually not compounded, a stark difference from credit cards. It is important to note that BNPL is essentially still a loan and therefore BNPL providers can report one’s repayment behaviour to the credit bureaus.
Experts say, just like any other loan, it will still fall upon the customer to make repayments promptly to maintain a healthy credit score since most BNPL providers report repayments to credit bureaus.