Buy Now, Pay Later: Credit’s GenZ Avatar
Call it a disruptive business model or a FinTech product: Buy Now Pay Later (BNPL) is the new kid in the block taking the world by a storm.
If there’s one habit that the pandemic has made me follow religiously, it is undoubtedly that of reading books. I was looking to purchase paperbacks of Madeline Miller’s bestsellers, and over the past few weeks, I have been tracking their prices on an e-commerce app, eagerly waiting for a drop. Turns out, people around me are in the same preoccupation too, albeit for different products.
With no appreciable price change, my penchant for hoarding books took over and I ended up adding the books to my cart on the same app. As I proceeded to complete the purchase, I was presented what was almost an offer made by Don Corleone himself: a cashback on the purchase which actually was a welcome offer for the app’s ‘Pay Later’ service. There you have it: my first encounter with Buy Now, Pay Later (BNPL) and my inspiration to write this article.
Introduction: The Forest of Enchantments
BNPL is arguably the hottest topic in FinTech today. Simply put, a use case for digital payments (encompassing almost every purchase these days) is also a use case for instant lines of credit. The concept is self-explanatory, and it is not novel entirely: such micro-credit systems have been in practice for centuries among traders by trust, obviously without the aid of technology. As of November 2021, the BNPL market is expected to grow tenfold within the next four years, and captured ~9% of e-commerce payments by then.
Many factors can be attributed to the rise of BNPL, but I intend to start by explaining a fundamental psychological reason which a lot of you might be aware of: the pain of paying. Fancy this: you’re at your favourite Japanese restaurant, enjoying a delectable sushi platter. As you’re feasting, the waiter presents a four-figure bill that makes you frown for a moment. This negative manifestation can be attributed to natural loss aversion in human beings — handing over money is akin to losing money. The pain of paying help reduce spending; it is a concept from behavioural economics that has also been the darling subject for neuroscientific research. The beauty of the concept is that it varies across modes of payment: much lesser in card payments as there is no tangible loss being witnessed.
In the sushi situation mentioned above, what if the restaurant offered you the option to pay the bill at your convenience? This is music to your ears — you live the moment as you are provided with a sense of relief. Such is the concept of BNPL in goods and services: it makes a prima-facie large purchase more palatable. Many other factors can be attributed to the growth of BNPL: the rise of e-commerce offering various payment methods, the seamless KYC, the paradigm shift in the spending patterns of tech-savvy millennial and Gen-Z cohort, and lastly the convenience, instant gratification, and affordable repayment plans that makes it an offer one cannot refuse. A large chunk of its boom can also be attributed to the pandemic when incomes became unstable.
In India, the maximum credit limit of BNPL is currently ₹1L, allowing customers to pay within 15 days without interest (most common), or a no-cost EMI option spanning up to 12 months with options such as auto mandates, and add-ons such as UPIs and more: all of this with zero paperwork and zero hidden charges. Also, skip the steps of OTP verification, entering card details and recharging your wallet every time you need to make a payment!
The Jekyll and Hyde called BNPL
BNPL providers generate revenues not only from repayment interest (around 10–30% based on many factors), but also from sellers who offer the payment mode. In case of sellers, they pay BNPL a fee ranging between 2-8% of the purchasing amount if the customer uses the BNPL facility. The benefits of sellers providing BNPL are many because customers are enticed to load their carts with impulsive purchases. As a result, sellers record lower cart abandonment rates, higher ticket size per transaction, and therefore faster inventory turnovers and higher customer loyalty. Such boons to sellers also enable BNPL players to solidify their positions through various marketing or promotional schemes if sellers are able to increase conversion or even traffic.
The flipside to the basket of benefits is that BNPL, in the end of the day, is a loan at its core which the customer has to repay and has credit score ramifications. As far as sellers are concerned, small merchants in particular will have to work around integration challenges, make technology a cog in their value chains, and bear the fees involved to compete with larger online and offline players. Lastly, lending to so-called ‘thin file customers’ is a gamble that BNPL players have chosen to plunge into for uncalibrated growth.
Challenger Startups: a Slice of Gen-Z Life, a Slice of the Lending Pie
The target market for BNPL are millennials and Gen-Z, and a few common characteristics of these cohorts are: lower purchasing power, instant shopping, unpredictable credit ratings among others. Traditional credit lending systems provide cards characterized by long processing times, annual maintenance fees, rigorous paperwork, heavy interest rates and hidden charges. The flexibility provided by BNPL prevents binding one to traditional banks — apart from the transaction process itself, BNPL helps customers circumvent financial strain and burden that may arise due to purchases of any sort.
On this note, there has been a solid uptick in firms offering BNPL: ZestMoney, LazyPay, Simpl, ePayLater are the pureplay players in this space. These companies provide lending lines in partnership with established banks/NBFCs. With the growth of online shopping, many retailers like Amazon and Flipkart have entered the BNPL space — and to good effect, as their sites witnessed a spike in their 2020 festive season sales. Banks such as ICICI (with PayLater) and HDFC (with FlexiPay) have also jumped the bandwagon to cater to new customer segments (only 3% of the Indian population has a credit card). The foray is not bound to e-commerce, as ICICI Bank has partnered with PoS giant Pine Labs to offer in-store pay-later facilities to retail consumers. The allure of BNPL has brought even services like Ola and IndiaPost to offer micro-credit lines!
Credit card players are becoming wary of the inevitable tussle with BNPL products, but given the aspirational value that a credit card brings with it, and the entirely different segment it targets, I envision a co-existence of both without the need of much clairvoyance. Bangalore-based FinTech startup Slice has gone the extra mile by providing customers the ‘best of both worlds’: positioning itself as credit card challenger offering a no-fee VISA card with credit limits as low as ₹2,000 with upgrades on timely payment, and acceptance across all merchants which accept VISA. With claimed NPAs less than 2%, Slice is very well positioned to make micro-credit the pièce de résistance in India’s FinTech smorgasbord.
Closing ‘Credits’
If there’s a one-liner I can think of for BNPL apart from the article’s title, it has to be ‘making formal microlending as informal as it can get.’ Such form of lending comes with two key caveats: the want of regulation, and the potential for malpractices. The reason I bring these two to the limelight is that FinTech firms offering BNPL, as of the date of this article, doesn’t fall under the purview of regulatory bodies. Due to the lack of ‘robust underwriting’ so to speak, the chance of defaults are high, and some companies in the space may not be reporting default details accurately to credit bureaus, or not following necessary onboarding processes. The result of customers being over-leveraged is that of a vicious cycle: the situation of reaching a debt trap becomes more imminent than it should be. To bring such companies under the ambit of regulations and RBI’s code of conduct, a working group set up by the RBI itself has come up with a set of recommendations such as setting up a nodal agency and rules pertaining to First Loan Default Guarantee agreements.
All in all, BNPL if used and understood responsibly by all parties is a powerful tool in the realm of lending. There is a conspicuous need for such a line of credit, and it stands to only help commerce and the economy grow in leaps and bounds.
(Disclaimer: The author is a Business Consultant in the Banking, Financial Services, and Insurance domain at Tata Consultancy Services Ltd.)
Sources
a. BankBazaar article: BNPL
b. Inc42 article: BNPL Models
c. Simpl website: Blog on BNPL
d. FinTech Singapore article: Top BNPL players in India
e. Bloomberg article: BNPL and festive sales in India
f. Allied Market Research: Global BNPL outlook
g. RBI website: Working group report on Digital Lending
h. Newspaper articles: MoneyControl, FinancialExpress, Mint, ET
