Consumer credit. What is Buy Now, Pay Later

What is Buy Now, Pay Later all about?

Buy Now Pay Later or BNPL, as it is popularly known, is a financing option which allows you to buy a product or avail a service without having to worry about paying for it immediately. It’s 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 future date with little or no interest charges. The repayment can either be in lump sum or in the form of equated monthly instalments (EMIs). 

In what way is it different from credit card payment?

Both credit cards and BNPL are similar in a sense that both offer deferred repayment options to the borrower. However, there are certain key differences between these two credit products. First and foremost is the ease of access. While availing a credit card requires a good credit history and involves stringent verification process, BNPL provides hassle-free access to credit. You could simply shop for a product on 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 differ in other aspects too. For instance, credit cards typically offer interest free credit periods up to 45 days while BNPL often comes with interest-free loans with a shorter credit period, say 15 days to one month. Credit cards come with charges like joining fee, recurring annual fee etc, which can be higher for premium cards. On the other hand, BNPL comes with no such charges. 

How prevalent is BNPL as a mode of payment in India?

The market for BNPL is booming in India. Thanks to the rise of e-commerce and digital payments, low credit card penetration and rapid increase in the number of fintechs who are disrupting the traditional methods of accessing credit. The ease of access to credit has made BNPL the most preferred product among GenZ consumers, young millennials, new to credit borrowers, who were often underserved or overlooked by traditional banks. 

According to RazorPay’s The Covid Era of Rising Fintech report, the India BNPL market grew more than 637 per cent in 2021, higher than the 569 per cent growth registered in 2020. Indian consultancy Redseer estimates the BNPL market to grow $3-3.5 billion currently to $45-50 billion by 2026.

There are around a dozen 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 into the BNPL bandwagon. This includes HDFC Bank’s FlexiPay and ICICI Bank’s ICICI PayLater. Axis Bank also bought Freecharge from e-commerce firm Snapdeal. 

Why are purists worried?

Because they fear such easy access to credit, which are mainly for discretionary purchases, may lead borrowers to a debt trap. Though small in size, availing multiple loans from different lenders at the same time will impact the borrower’s repayment ability and this affects the credit culture. Since these are primarily focused on first time borrowers with no credit history, the lenders also run the risk of higher non-performing assets (NPAs) if the borrowers default. Even credit bureaus say that it is still early days of BNPL and the reporting mechanism is not as structured and fool-proof as in case of credit cards.

What are the regulatory issues with it?

Regulators across the globe are cracking down on buy now, pay later industry amid concerns over excessive and unregulated lending, absence of credit history, customer data privacy and flourishing illegal lending among other issues. 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, high-cost consumer credit provided by BNPL lenders. 

In India too, the Reserve Bank of India is keeping a close tab on the digital lenders. Last November, a working group constituted by the RBI found that 600 out of 1,100 lending apps on Indian app stores were illegal. The report focused on enhancing customer protection and making the digital lending ecosystem safe. Some of the key suggestions of the working group report include subjecting the digital lending apps to a verification process by a nodal agency and setting up of a Self-Regulatory Organisation (SRO). The working group also recommended treating buy now pay later (BNPL) arrangements as balance sheet lending. This in turn may mandate knowing your customer (KYC) and credit score checks before extending BNPL options to borrowers.