AN OVERVIEW OF BUY NOW PAY LATER (BNPL) - Kaveri Dixit

 

BNPL which stands for Buy Now Pay Later is a payment mode that has become very popular in the recent past especially for e-commerce platforms.  As the name suggests, it allows the users to buy goods and defer the payment by a week, a month or more in instalments, which are mostly interest free. In 2021 there were roughly 5 million BNPL users in online retail and the number is projected to grow to 30 million by 2026. Some of the major players in BNPL app market in India are Zest Money, Freecharge Pay Later, Lazy Pay, Paytm Postpaid, MobiKwik, Amazon Pay Later, Flipkart Pay Later, etc.

 

Distinction Between BNPL and Credit Card

BNPL seems very similar to credit cards which allow the user to pay a bill at a later date. However, it is not the same. Credit cards are instruments issued to someone who meets the minimum income requirement and has a reliable credit history. It takes a few days’ time to get a credit card issued. Credit cards also charge an interest if a user delays or defaults a payment. The issue of credit cards is mostly done for people with a high credit score. Further, credit card issuer may charge a joining fee and/or recurring annual fee.

On the contrast, BNPL does not have any eligibility criteria and is instantaneous. It does not have a joining fee either and is mostly targeted at millennials, students and people with income lesser than that required for credit card issue. BNPL companies may, however, charge an interest if a user fails to pay the due on time.

 

Business Model

Now let us deep dive into the business model of BNPL. These entities collaborate with vendors (e-commerce or physical stores) and charge a fee from them. For example, if you buy a product worth ₹1000 using a BNPL option from an e-commerce website, the BNPL player may charge a small fraction of the amount, say 5% from that e-commerce portal. Hence, the consumer gets the product, the e-commerce platform gets ₹950 and the BNPL platform earns ₹50. Now the question arises that why would the e-commerce be ready to give away this fraction while it can keep the whole revenue by not tying up with this app? This is because it you bought that pair of shoes while you would have ditched the purchase if not for the option of paying later (most probably at a 0% interest rate) through these apps. BNPL helps the e-commerce converting a potential customer into a buyer, driving up their sales.

Apart from this, as mentioned earlier, some BNPL players also charge an interest from consumers and an extra fee if they fail to repay the amount on time. This also adds to their earnings.

 

Advantages and Risks

BNPL apps can act as an alternative for people who don’t have access to a credit card and give them a chance to purchase products that were not affordable for them earlier. This is especially useful for students and people with income below the eligibility level of credit cards. One can get the option on BNPL at a click and make purchase at zero interest rate.

While BNPL seems like an enticing option, it is not risk free as there is chance of frauds in this space. There are high chances of non-payment by users which means BNPL players take a hit whenever the user doesn’t make a payment. Additionally, due to lax KYC norms and lack of regulation, fraudsters can steal credentials or create fake accounts to make purchases using BNPL.

Further, BNPL also gives rise to more consumerism by giving users to purchase goods that they cannot afford to buy given their income level, leading to bad financial management.

 

RBI's regulations affecting BNPL

In June 2022, RBI issued a circular on prepaid payment instruments (PPIs) such as wallets and prepaid cards, restricting the loading of credit lines by non-bank entities into them. This also applies on BNPL companies who were looking at issuing their own physical cards that could be loaded by NBFCs. RBI’s regulation aims to curtail the same and reduce the risk of non-payment by users with low credit worthiness.

Moreover, recently RBI issued an update on securitization that might affect BNPL companies. According to the update, lenders cannot undertake securitisation activities or assume securitisation exposures on underlying assets of loans with residual maturity of less than 365 days. This means that BNPL companies who have tie ups with NBFCs and could earlier leverage low-cost funds using securitization will not be able to do the same now.

I believe that this is a step forward to reduce risks involved in BNPL platforms. More stringent regulations on KYC can further help in reducing frauds in this space and make BNPL a truly advantageous mode of credit for users with low purchasing power.