Buy now, pay later: A boon or bane for consumers?

Given that online shoppers in India are a staggering 170 million, there is immense scope for BNPL in India. Image: Shutterstock

BNPL (buy now pay later) is an unsecured loan service through which a customer or borrower is entitled to purchase a product on a current date and clear the amount either in lumpsum on a future pre-determined date, or as per pre-agreed instalments. BNPL provides easy credit for customers and also helps galvanise commerce for merchant partners.

This is a widely accepted and a well-developed ecosystem in advanced economies such as US, UK, Australia, Sweden—popular among millennials and Gen-Z. Fashion, beauty, home, lifestyle, sports good being the most popular BNPL spend categories.  A few of the BNPL service providers have grown at 100 percent CAGR between 2019 and 2021, currently contributing more than 10 percent of total ecommerce payments in select developed western markets like Sweden, Germany and Australia.

BNPL in India

Even in India, millennials and Gen-Z consumers (50 percent of India’s population) form the backbone of the BNPL landscape. Although credit cards and personal loans are readily available, a certain category of consumers, for instance, those who have no credit history or have already availed maximum credit through traditional channels, are keen to apply for short-term credit products, on account of ease of application as compared to the stricter processes involved in obtaining a traditional unsecured facility.

BNPL has been increasingly getting popular among the young income earners on account of a seamless on-boarding experience, extension of credit facility to NTC customers (albeit smaller credit limits), low-cost structure (subscription fee, zero percent interest rate product) for the customer and facilitating easy repayments. The entire process can be completed by the customers in a few minutes and the credit limit is available instantaneously. The BNPL vector is also driven by the online commerce industry which is growing at 30 percent CAGR.

At the moment, the major credit products that are available digitally include personal loans, credit cards, and SME loans. There has been a significant customer uptick in availing BNPL, where the volume of loans is high but the average ticket size of these loans is low.

End-use

Millennials and Gen-Z are maximising the BNPL option, as they find it the most convenient route for effecting purchases on e-commerce portals. With BNPL in place, consumers are purchasing things they couldn’t earlier afford. Buyers have been provided with an interest-free window of 15 to 45 days, it can go up to several months if the prices of goods or services have been divided into instalments.

Benefits

By aggressively leveraging BNPL, consumers are benefitting the most, as they now have access to credit which was not earlier available for NTC (new to credit) borrowers. It also helps in instilling financial discipline in terms of debt servicing, and therefore, builds credit history that will assist in the future access of relatively cheaper loans.

The partner merchants are benefiting as commerce on their platforms has increased to such an extent that high margin merchants are now offering interest subvention to their customers.

Institutions offering BNPL products have enhanced their revenues on account of multiple income streams like finance cost and subscription fee and it helps them build a base of customers who will utilise credit products more extensively in the future.

Pitfalls

Access to easy credit can lead to impulsive spending. If credit is not availed judiciously, customers can be burdened on account of debt accumulation. Exercise caution and borrow only as per repayment capacity.

BNPL is generally the first credit product for customers, who come from diverse backgrounds such as geography, income, profiles and more. The evaluation process does not include an in-depth background check, and as such could result in higher defaults. Companies offering BNPL would need to micro-manage portfolio risk.

Internationally, astronomical growth in BNPL has invited attention from the regulators. Consequently, in India too, we can expect welcome regulation for this sector.

The road ahead

In the years ahead, the BNPL market is likely to flourish on an exponential trajectory, in tandem with the continuing rise of smartphone users (currently estimated at 800 million) and an increase in connectivity, especially in the tier II and tier III towns. As per RBI, the total number of credit cards currently in use are 65 million and it is estimated that unique card users are approximately 40 million. Given that online shoppers in India are a staggering 170 million, there is immense scope for BNPL in India. As a product category, BNPL can be extremely beneficial for all the principal constituents, especially in a credit starved country like India.

The writer is founder and managing director, MyMoneyMantra.com.

The thoughts and opinions shared here are of the author.