Why we are excited about BNPL
Rise of BNPL in India — Leveraging technology to democratize credit access
Covid-19 has undoubtedly had an impact on the credit and commerce sectors in India. On the one hand, economic uncertainty coupled with rising unemployment has led to unfavorable lender sentiment around unsecured lending. On the other hand, the pandemic has spurred e-commerce adoption in the country, which coupled with pay cuts and job losses has led to an increased affinity for a digitally native credit offering — Buy Now Pay Later (or BNPL). As per the Global Payments Report 2021 by Worldpay from FIS, BNPL is the fastest growing online payment method for e-commerce in India and is expected to capture ~9% of the total market share by 2024, growing at a 53% expected CAGR (2020 share ~3%).
Credit penetration in India has suffered traditionally, owing to a deep-rooted fear of falling into debt traps as well as the restricted availability of credit options. It is of no surprise then that credit card penetration per capita in India stands at only 3% as compared to 42% in China and 183% in South Korea. For small businesses, the lack of access to formal credit has led to either unmet capital needs or increased reliance on informal sources with high cost of borrowing. By leveraging technology, BNPL providers have paved the way for democratization of credit by enabling consumers and small businesses to instantly avail short-term digital credit, without the need for credit cards or a robust credit history. They have transformed POS financing from a paper form-filling process (Bill me Later) to a digital installment program with real-time credit disbursal. The idea to break up large ticket purchases into smaller pre-agreed installments has opened an alternative for people who may not be served by the formal credit ecosystem.
The majority of BNPL providers offer services at zero or low-interest rates and enable instant credit decision and access at checkout, thus, enhancing the purchasing power and reducing friction for customers. For customers, the need of the hour is not only affordability and instant gratification but also convenience and transparency and hence, BNPL offers several advantages over traditional lending instruments. Clear and upfront communication on the payment dates and due amount (including interest, if any) provides customers with a sense of security, unlike credit cards where they are constantly anxious about hidden charges and compounding interest rates. By providing convenience, BNPL helps to enhance the overall value proposition of the merchant’s offerings, enabling increased sales conversions (lower funnel drop-offs) and cart sizes. The ability of BNPL to benefit both the customer and the merchant sides has been responsible for its explosive growth globally, especially in countries where credit cards are unpopular, such as Sweden and Norway.
Klarna, Afterpay, Affirm, and Sezzle are key global fintech players who have raised billions of dollars in funding from marquee global investors. The appeal for Venture Capitalists lies in the fact that BNPL players have varied revenue streams, including Merchant Discount Rates (MDR), service fees from lending partners, late payment fees from consumers, and/ or interest income from lending. While Afterpay and Sezzle have both launched IPOs and are today valued at ~$24 billion and ~$1.4 billion respectively, Klarna has raised ~$3.3 billion in funding till date and has a valuation of $45.6 billion. In India too, fintech companies are leading the way to extend BNPL offerings to consumers and small businesses. However, there are few key differences in the overall business model to make this innovative form of POS financing work in the Indian context. To understand these differences, we have looked at two Indian fintech players whose models appeared interesting to us.
The first is ePayLater, which provides a deferred payment offering to small retailers (B2B). The company provides access to interest-free credit to kirana stores for a 14-day period. It works with large anchor clients, i.e., large brands, online marketplaces, large retailers from the cash and carry space such as Walmart and Metro to onboard their kirana partners. This gives ePayLater access to a wide network of kirana stores as well as their digital transaction history and sales data, thus, improving underwriting and reducing the cost of customer acquisition. The company leverages the existing on-ground teams of large retailers to take orders from kiranas and avail the credit facility on their behalf in a frictionless manner. ePayLater leverages both partner as well as its own NBFC to extend this credit.
The second is Flexmoney, a multi-lender fintech platform that extends cardless no or low-cost EMI options to consumers (B2C) at checkout, with the total amount split into a fixed number of affordable installments. The company has partnered with multiple banks such as Kotak Mahindra, IDFC First, etc. to enable them to extend instant unsecured credit to their existing customers when they shop online across various merchant/ e-commerce websites. This helps banks expand their loan book while ensuring low delinquency rates. The platform has integrated with several payment gateways — Razorpay, Cashfree, Juspay, CC Avenue, etc. to enable easy and seamless merchant activation. Flexmoney does not carry any credit risk, instead, it charges lenders a processing fee.
As can be seen from the above models, fintech players in India have incorporated certain unique elements to ensure a viable business model. Firstly, instead of lending off their own balance sheet, some BNPL providers have adopted a pure-play platform approach by partnering with multiple existing traditional players in the ecosystem. Lenders can bear the risk and underwriting responsibility, while fintech players provide seamless onboarding and processing facility along with access to a wide network of merchants and retailers. This multi-lender approach is beneficial to merchants as well since it ensures credit access for a larger base of customers and hence, increased sales. Secondly, BNPL providers in the west have a more consumer-facing approach vs players in India wherein the latter use a more B2B2C approach to reach the end-customers by integrating with online marketplaces, merchant websites, and/ or payment gateways. For example, Klarna has an app and a card and has used them to build its own consumer base, thereby offering new leads as a value proposition to the merchants. Similarly, the Affirm app provides tailored and exclusive offers from merchants based on consumers’ spending and shopping habits. Finally, the go-to-market strategy for Indian fintech players, especially those providing a B2B offering for the informal sector, requires offline interventions to ensure widespread reach and adoption.
So, what will it take to win in the BNPL sector? Unlike credit cards, availability is key here — consumers will end up choosing the financing plan that is immediately accessible to them at checkout. Secondly, it is important to integrate into the consumer’s purchase experience as seamlessly as possible. As per the McKinsey Digital Commerce benchmark, full integration of POS financing into the consumer’s buying journey draws 2–3x conversions compared to only integrating superficially at the checkout page. Thirdly, it is important for BNPL providers to diversify their revenues across merchants as well as adopt efficient go-to-market models to keep the customer acquisition cost low. Finally, providers need to be conscious that unsecured lending in whatever shape or form is a high-risk proposition. Hence, strong underwriting is key to optimize the cost of collections as well as defaults.
As expected, BNPL offerings have received an inordinate amount of love from the traditionally under-served and new to credit consumers, i.e., millennials, GenZ, and residents of lower-tier cities. While Covid-19 has played a key role in accelerating its adoption, we believe that BNPL holds the potential to unlock unprecedented value for all stakeholders involved and hence, revolutionize the credit and payments landscape in India.
