Buy Now, Pay Later - A Financial Revolution or a Trap?

BNPL, or buy now pay later, is a form of short-term financing that enables customers to make purchases and pay for them at a later time, frequently without interest. Another name for BNPL is “Point of Sale Installment Loans.” POS Loans are provided by retailers to customers at the point of purchase of items, helping them to purchase the service or good. In essence, it is a way for a buyer to buy a product on credit without using a credit card.

What, though, is a BNPL exactly? Do you have a small-scale credit card or a personal loan? In reality, BNPL is a combination of both. It is a modest form of personal financing that enables buyers to make purchases without having to pay cash.

Working of BNPL

At the moment of payment check-out on online purchasing platforms, BNPL platforms provide zero-interest credit. The partner banking or non-banking financing company (NBFC) of the BNPL platform facilitates the credit. Because they provide services similar to those of banks but lack a banking licence, NBFCs differ from banks in this way. Consumers benefit from NBFCs because they enjoy greater flexibility and can provide competitive rates because they are not subject to RBI regulation and instead base their interest rates on prime lending rates.

The significance of NBFCs for BNPL is now under question. The actual lenders are NBFCs; a BNPL platform submits permission requests to an NBFC, which, upon approval, credits the loan to the consumer and completes the transaction.  In FY22, BNPL reported to comprise roughly 37 per cent and 11.91 per cent of the total loans disbursed by banks and non-banking financial companies (NBFCs), respectively. The BNPL industry’s share in digital payments is expected to increase to 9 per cent by 2024.  

BNPL is a pre-approved credit line, not a form of payment. When a consumer signs up for the BNPL platform, they are assigned a pre-approved credit line, which is where the credit supplied at the time of checkout comes from instead of being authorised right away. In the financial records of the customers and the suppliers, this credit line is listed as Personal Loan. Even if we don’t use the full amount, it still appears on our books as an outstanding loan.

Credit Card v/s Credit Line

The base level Credit Card in India is issued to people with an average income of more than 1.44 lakh per annum with a limit of 25000-50000 rupees. People with income below 1.44 lakh could not see the face of credit cards thus allowing only 3% of the total population in India to have a credit card. This is where the BNPL platform comes into play.

A student with a bank balance of Rs.1500 and a pocket money of Rs.2000 who wants to buy a Rs.3000 shoes with no credit card will remain unsuccessful. Here’s where BNPL comes to play and allows the student to buy the shoes. The student can pay Rs.2000 in a single go and pay the left amount in few months without paying any interest. Hence the affordability of the shoes has been increased, probability of the sales of shoes has been increased and also the scope of the apparel company to sell high ticket products has been increased due to BNPL. The expansion of market for the company has been the most important point of advantage of BNPL.

BNPL in India

Online shopping was encouraged by the economic shifts brought on by the pandemic. People used the internet to order food, clothing, and other necessities. Buy Now Pay Later (BNPL) emerged as more than just an easy way to make a payment; by offering free EMIs, it effectively reduced the stress that borrowers felt about their finances. By 2024, Goldman Sachs projects that the Indian e-commerce market would be worth $99 billion. BNPL will rise from 3% in 2020 to 9% in 2024, making it the online payment option with the quickest rate of growth. Digital natives and tech-savvy customers, millennials and Gen Z, are rapidly embracing the concept of micro-credit and purchase now pay later services for a more seamless user and merchant experience.

On the other hand, time and effort are expended due to the challenges of verification, credit score requirements, multiple rounds of identification, etc. As millennials and Gen-Zers grow impatient with conventional paperwork and demand for flexibility and transparency increases, BNPL has stepped up to eliminate these areas of friction. A study predicted that the $3–3.5 billion BNPL market in India would increase to $45–50 billion by 2026. Additionally, from the current 10-15 million users, there may be 80-100 million BNPL users in the nation by that time. An economy like India that lacks access to finance may benefit from loans from BNPL. In contrast to traditional credit, BNPL loans are mostly used for online shopping and utility bill payment. 

These features of BNPL are now making it the future of online trade.

Dark Side of BNPL

Although the BNPL experienced an astonishing 637% growth in 2021, the RBI outlawed the loading of PPI on credit in June 2022. The buyers can afford pricey things, the vendors have more clients, and the fintech companies are profitable. Why, therefore, would the RBI object to this? Let’s first comprehend the PPI (Pre-paid Instrument) notion. Here, two different kinds of businesses are involved. Fintech firms (BNPL providers) come first, followed by stakeholder firms (banks or NBFCs). Fintech companies partner with stakeholders since they lack the authorization to offer PPI to users. 

We were able to utilise both BNPL cards and credit cards after these Fintech companies started acting like credit cards. These cards are typically provided to those with lower incomes ($20,000 or less per month) and younger ages (under 25). If you regularly spend Rs. 1000 on groceries, but are provided a BNPL card, you might spend Rs. 1400 or Rs. 2000. This feature significantly raises the order value of the clients. These statistics come from BNPL companies that are registered. Therefore, these businesses automatically increase the purchasing power of the populace, but is this increase worthwhile? No. BNPL could trap people in debt. 

In Australia, 15% of BNPL users had to take out loans in order to pay the BNPL credit. In the US things are worse. 1 in 3 BNPL users are short of at least 1 purchase payment. The opportunity cost of BNPL is very high.

The Bottom Line

BNPL is gaining immense popularity because of its ease of use and flexibility in payments. For Indians who are relatively new to credit, it is a potential alternative to establish a solid credit history. However, consumers must understand that it is still a loan which needs to be paid back on time and may lead to a drop in credit scores if used without careful financial planning.

References Used

www.investopedia.com/buy-now-bepay-later/https://timesofindia.indiatimes.com/blogs/voices/is-buy-now-pay-later-the-future-of-lending-in-india/ 

https://epaylater.in/blog/difference-between-credit-card-and-bnpl

By Shashank Lohia