Pay Later — Convenience or Credit

Pranjal Choudhury
Sep 8, 2018 · 6 min read

It’s Friday evening and I decide to skip cooking after a long day at the office. Launched the Swiggy app, chose the items and made the payment with Lazypay, all within 3 minutes.

At the time of payment, No CVV validation. No OTP validation. No hassles of login into a bank account (for net banking). Nothing.

Just 1-Tap. Poof. And your order is Placed!

I have been using the “Pay Later” options for quite sometime now. Be it through the stand-alone options such as Lazypay or Simple, integrated with various merchants OR merchant-owned options such as Ola PostPaid.

While my reasons behind using the “Pay Later” option is primarily for the benefits of faster checkouts, reliability and single bill, I wanted to delve more into more use cases of this option as well as the offer mechanism — eligibility, current players, opportunity, default rates, future impediments. Hence this piece. So, let’s get going.

Why do people use the “Pay Later” option?

Despite the plethora of payment options ranging from Credit Card, Debit Card, Net Banking, Wallets, UPI etc., there is still a decent sized segment of online transacting users in India who avail this “Pay Later” option. Some of the reasons could be:

Faster Check-outs: Beyond the 1st time account creation, where one has to enter a Mobile number and do a OTP validation, for subsequent purchases, the payment via “Pay Later” options is just 1-Tap. This makes “Pay Later” options even more attractive for high frequency low-value purchases. Quite unlike other payment methods like Credit Cards, Debit Cards, Wallet, UPI etc. where due to 2-FA stipulation from RBI, user cannot avoid OTP, CVV validations etc. Unlike Wallets too where you either have to remember your balance or top-up on realising that the existing balance is not sufficient.

Credit without a credit Card: Users who are not eligible for a credit card or don’t want to have a credit card but still want to avail credit facility, take to the “Pay Later” option as well. At the end of the payment cycle, users are expected to clear their credit dues

Surety of Payment Success: Compared to a rough failure rate of ~20% for cards or net banking as mentioned here, payments via these “Pay Later” options have an almost 100% success rate, reducing customer retries and frustration. At the same time, this improves customer loyalty towards the “Pay Later” payment option.

Single Bill: Itemised bill for payments made across as diverse scenarios as buying groceries, ordering food, buying movie tickets. Depending upon the player offering this credit, the payment cycles vary but typically have a 15-day cycle

Good-Enough Credit Limits: With behavioural profiling (past history & real-time at the point of payment), users are offered comfortable enough credit limits (< INR 10,000) to cover for their purchases (mostly < INR 1,000). Depending upon the user purchase history and credit behaviour, credit limits might change to accommodate for likely friction if user is hitting his/her credit limit often within the same payment cycle

Who are the players providing “Pay Later”?

LazyPay, Simpl and EPayLater are three of the standalone major players offering “Pay Later” options. Given the friction-free and inherent credit nature, increasingly merchants are developing their own credit product like OlaPostPaid, Flipkart Pay Later. The merchants have an inherent advantage since they have access to their customer’s transaction history, locations, returns and other behavioural data, enabling them to roll-out the credit product to very specific user segments and mine the data to enhance their data model behind this credit offering further.

In fact, on Ola, the default option for payment is Ola Postpaid (their credit product) instead of Ola Money (their Wallet). Food for thought?

What % of users use the “Pay Later” option?

Per certain articles like this one, at any given merchant (depending upon the tenure of the on-boarding with the stand-alone “Pay Later” companies), between 40%-70% of the users are pre-approved to have the option for “Pay Later” if the merchant has a tie-up with such a player or has its own pay-later product.

While I could not find any official numbers w.r.t % contribution of “Pay Later” to transactions for a given merchant for Simpl or for Lazypay, but from this article, quoting EPayLater which powers “Pay Later” for IRCTC, about 0.1% of total payments on IRCTC happen through “Pay Later”. However, the on-boarding experience for a FTU (First Time User) for EPayLater is much more cumbersome compared to a Simpl or Lazypay. Hence, 0.1% share is probably the floor and the number of the other “Pay Later” players can only be higher, maybe 4x-5x (using a proxy of app downloads of EPayLater vs. Lazypay).

For merchants with their own “Pay Later” options, I did not come across any publicly available data on the adoption of this payment method vs. other payment methods or their contribution to overall transactions

Given that the % contribution is still low, high-frequency categories gaining traction (e.g. ordering food) and payment failures persisting in online options, the size of the opportunity for these players is huge.

With these “Pay Later” players also coughing up Cashbacks for FTUs like the tactic followed by Wallets, trial rates are likely to increase.

How does the Credit-model work?

The Pay-Later companies rely on data to decide whether to enable the pay-later option for a particular user at a given merchant with whom they have a tie-up. These data models use data that the Pay-Later company might already have from other merchants (for all players) via transaction data on payment gateways (e.g. LazyPay that belongs to PayU) used by close to 300,000+ merchants.

When a Pay-Later product is powering a merchant, the pay-later options is displayed on the payment page of the merchant based on user profiling. Decision to display might include but not limited to no. of transactions, average order value etc. along with other data that the Pay-Later company might already have. This decision to display or not is augmented further with real-time data such as current order value, typing speed, location etc. All this is powered by data and is dynamic, needing calculations+feedback within seconds.

Depending upon the outcome from the data crunching, the user will be displayed the Pay-Later option or not. For a FTU (first-time-user), the person has to enter mobile number and validate with OTP. For repeat users, the person just has to click on the Pay-Later option. If credit is available, user can seamlessly complete the payment with just 1-click

Credit limit for a user depends upon multiple factors such as: Regular repayments, spending habits, transactional SMS as outlined here


Monetization — “Pay Later” players can earn revenue from the following streams:

a. Commission from Merchants (e.g. through propositions of lowering COD & reducing online payment failures)

b. Late fee (~ Rs 10 per day) from users

c. Interest rates (for transfer from credit limit to banks). This is still nascent and adoption is likely to be even lower

Payment defaults are inherent in this model where a user’s mobile number is the point of access, identification and assigning credit limits. However, since the initial credit limits assigned will be lower and max credit limit after many repayments and usage will still be INR 20,000 or lower, risk of defaults and exposure is still lower. That being said, reports mention that the default rates are to the tune of 3%-4%, almost similar to defaults in the more rigorously-checked-before-issuing Credit Cards.

With “Pay Later” stand-alone businesses such as Simpl or Lazypay, they can block the option for a defaulter from appearing on the payment page of a merchant till the dues are cleared. A merchant-owned “Pay Later” has the option of blocking the user from using the merchant’s services altogether.

Recovery by these stand-alone “Pay Later” businesses primarily happen via sending of Emails and SMS. Given the razor thin margins and lower 4-digit dues, I sense that resource-heavy models of recovery like increasing call-centre agents for repeated calling are still far-off or in plain terms, uneconomical.

Regulation might still affect these “Pay Later” standalone companies and merchants offering their own “Pay Later” versions. While credit cards still need a 2-FA, the “Pay Later” versions still seem to be flying under the radar as far as RBI is concerned. This might be because this payment method is still being treated as a “payment innovation” and not contributing to significant enough volumes (0.1%-0.5%) of total transactions. However, if 2-FA is mandated, then it takes away a large % off the USP for “Pay Later”

Till then, the party continues with fast check-outs.

Sources:

  1. https://getsimpl.com/help/article/36/my-spending-limit-just-got-reduced-what-happened
  2. https://the-ken.com/story/pay-later-the-next-wallet/
  3. https://economictimes.indiatimes.com/small-biz/startups/a-raft-of-companies-want-you-to-ditch-old-payment-habits/articleshow/64809321.cms

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