BUY NOW PAY LATER (BNPL)

 

 

Buy Now Pay Later: BNPL schemes

BNPL is a short-term micro credit model, where consumers must pay little to no interest for online purchases through ecommerce platforms. Starting in ecommerce marketplaces, BNPL start-ups are tying up with food delivery companies, travel booking players as well as grocery and other essential delivery platforms. This has allowed consumers to purchase and delay the payment by 14–30 days or repay the amount over several instalments. The success of BNPL in the Indian context can be attributed to the fact that it offers formal microlending in an informal way, without putting customers through the cumbersome loan processes of traditional banks.

Shift Of Traditional Banks Towards BNPL Model

Buy now pay later (BNPL) is an emerging lending tech sector in India with the presence of several startups and fintech platforms now testing various strategies. In addition to pureplay BNPL start-ups such as Simpl, Lazypay, Zestmoney, ePayLater, ecommerce marketplaces Flipkart and Amazon India also offer their own BNPL products, while even fintech and payments companies such as PhonePe (via Flipkart) and Paytm have ventured into this territory

Simpl is working with over 2500 merchants and has over 7 Mn active users. Posting a compound annual growth rate (CAGR) of 36%, India’s BNPL sector is expected to reach $100 Bn by the end of 2023 which indicates just how popular these lending platforms are, even in their infancy.

Indian ride-hailing aggregator Ola also recognised the potential of BNPL and started offering Ola Post-paid, which also offers a pay-later option for 300+ third-party platforms, besides Ola itself.

While start-ups have led the adoption charge, traditional banks have held back from venturing into BNPL due to the fear of cannibalising their lucrative credit card business. It is only lately that banks have realised that credit cards and BNPL can coexist and complement each other. 

Banks are using BNPL to attract a new set of customers that have so far stayed away from credit cards. For instance, ICICI Bank partnered with payments giant Pine Labs to offer in-store pay-later facilities to retail consumers. This allows consumers to make high-value purchases with payments split over monthly instalments (EMI). Besides offering a no-cost loan product, it eases onboarding by reducing documentation. 

Similarly, in 2018, HDFC Bank also launched its Flexipay to provide zero interest credit for 15 days with a maximum credit limit of INR 60K. The bank partnered with Myntra, shoe maker Bata, OTA MakeMyTrip, healthtech start-up Curefit, beauty giant Lakme Salon, Urban Ladder and other platforms. 

Such BNPL EMI offers available at offline stores via PoS device providers are turning out to be a potent tool for small and medium businesses to revive sales in the aftermath of the Covid slowdown. While BNPL helped consumers make small-ticket purchases, it has also found traction in driving the purchase of white goods and other big-ticket items, even on ecommerce platforms.

The launch of Amazon Pay Later and Flipkart Pay Later is said to have boosted sales on their respective platforms especially in the festive season sales in 2020. Last year, Flipkart highlighted that EMI options and pay later were an important enabler of credit for customers this year. The company witnessed 7x higher spends though pay later option and 1.7x higher adoption of the EMI schemes. So the ongoing crisis and pandemic pushed ecommerce giants to look for new opportunities and offer unique financial services and credit products to customers led by the BNPL revolution.

 

Why are BNPL services gaining more attraction as compared to Credit cards?

 

Over the past few years, the Buy Now Pay Later (BNPL) has become a prominent financing form. In India, the demand for BNPL has been growing for about 2-3 years, further accelerated by COVID-19. BNPL has emerged as a more convenient payment method essentially decreasing the financial burden on borrowers by offering no-cost EMIs.

According to Goldman Sachs, the Indian e-commerce industry is poised to become a $99-billion market by 2024, driven by consumer demand. At the same time, industry experts say, BNPL will become the fastest growing online payment method, from a 3 per cent share in 2020 to 9 per cent in 2024.

A Q4 2020 BNPL survey predicted that BNPL would grow by 65.5 per cent in India, reaching a value of $11,570.7 million in 2021. The adoption of this payment mode is expected to rise at a 24.2 per cent CAGR from 2021 to 2028, taking the gross merchandise value of BNPL in India to $52,827.2 million by 2028, from $6,990.5 million in 2020.BNPL boosts conversion rates and average order values (AOV) for merchants by lowering shoppers’ purchase hesitation. It is expected to continue to rise in popularity as a payment method with benefits for all players. For instance, Flipkart recently expanded its Flipkart Pay Later services to make credit available not just on the platform but also on other partner channels, similar to other BNPL service providers Paytm Post-paid and Amazon Pay.

 

How do BNPL offerings work?

 

The core tenet of BNPL service is that it enables one to pay overtime – but afford what to buy, today. The credit period for BNPL services ranges from 30 days to 36 months, depending on the transaction size. Similarly, the credit amount also depends on the lender – for instance, while Flipkart offers a seamless checkout process for up to Rs 10,000, under their BNPL services, ZestMoney, another BNPL lender, offers up to a personalised limit of Rs 60,000.

BNPL facilitates a speedy one-click checkout process.” To avail of the BNPL services, the buyer needs to sign-up once at checkout and can proceed to use the solution when shopping across various brands and merchant websites. BNPL is usually low cost or no cost financing with a flexible repayment schedule.

 

How is BNPL different from credit cards?

 

The main feature of the ‘Buy now pay later is it is a one-click credit facility service available on checkout on merchant apps and websites. With BNPL, one can avail of this short-term credit option to make instant purchases and pay for them later. Here is how BNPL differs from credit cards:

 

Transparent and low-cost pricing model: BNPL usually follows a transparent and low-cost pricing model because a lot of the offers are subsidised by brands so that the customer gets the best value of the offering. Lizzie Chapman, CEO and Co-founder, ZestMoney, says, “Unlike credit cards that are meant to deceive the customer with hidden charges and exorbitant interest rates, BNPL is transparent. The customer knows exactly how much he/she will be paying.”

 

Completely digital and instant sign-up process: Anyone sitting in any part of the country can sign up and avail of the service. Credit Cards on the other hand require weeks and a lot of paperwork. With digital KYC, one can get instantly approved and start transacting.

 

More accessible: When compared, experts say, credit cards are for high CIBIL customers, people in metros and salaried folks. Only 30 million people in India use credit cards. Chapman of ZestMoney adds, “BNPL by nature is designed for a much bigger market, including new to credit customers or people with insufficient credit history. Most BNPL players use an alternative data and proprietary model to approve these customers. Also, Indians are leapfrogging credit cards to BNPL.”

 

Higher interest rate – Credit Cards or BNPL providers

 

It’s a well-known fact that credit cards are the most expensive form of credit. Interest rates on missed payments can go up to 48 per cent, whereas BNPL companies charge around 0 to 24 per cent interest rate depending on the merchant, tenure and the borrower.

 

Why are BNPL services gaining more attraction as compared to Credit cards? Why do youngsters find BNPL attractive?

 

There is a clear reluctance in consumers towards using credit cards and the biggest source of the disinclination comes from the ‘hidden charges’ or the various transaction fees a credit card company charges its customers.”

 “Annual maintenance fee, cash advance fee, surcharges on petrol, and GST charges are just some of the extra costs a user incurs for using a credit card. Paying at the time of delivery builds trust in the transaction and cash on delivery is a true 1-click checkout and this is what BNPL services offer consumers.” The BNPL service is completely digital, online and instant. It is easier, quicker to apply and get approvals. There is no need for an agent to come over for paperwork.

 

The Red Flag

 

Even with all the benefits and attractive features, industry experts say customers should be careful while availing of the buy now pay later service. Though it differs from one lender to another, late fees or penalties as one-time fees are charged, which are usually not compounded, a stark difference from credit cards. It is important to note that BNPL is essentially still a loan and therefore BNPL providers can report one’s repayment behaviour to the credit bureaus.

 

While BNPL has opened many doors for financial inclusion and opportunities, there are still a few important things that both borrowers and lenders must consider. Borrowers must know BNPL is essentially still a loan and therefore BNPL providers can report one’s repayment behaviour to the credit bureaus upon delay in payment. Experts say, just like any other loan, it will still fall upon the customer to make repayments promptly to maintain a healthy credit score since most BNPL providers report repayments to credit bureaus. Late fees or penalties can have a stark difference from credit cards as they are usually much higher. BNPL can tend to lead to higher impulse purchases and oftentimes, they create the repayment plan and users do not have a say on what date the payments are made.

 

Experts say, just like any other loan, it will still fall upon the customer to make repayments promptly to maintain a healthy credit score since most BNPL providers report repayments to credit bureaus.

 

Source : internet