The expanding realm and possibilities of the Buy Now Pay Later regime

A genesis that’s perhaps older than we think

There is a new genie in town – or perhaps ‘an old genie in a new bottle’ might be a more apt narrative for Buy Now Pay Later (BNPL) products. In the shape of consumer credit, BNPL was prevalent in the 19^th century with Singer sewing machines being sold for a ‘dollar down, dollar a week’. In the mid-1800s, makers of furniture, farm equipment, and pianos made their products more attainable by allowing customer to pay off their purchases weekly or monthly. As a concept, this has been rife in India since decades in the form of local ‘kirana’ stores with their ‘khata’ (an outstanding bills book) for customers buying on credit. But these were typically unstructured in nature – in fact, the credit card was the first organized BNPL offering.

As a loan product, Bajaj Finance pioneered BNPL in India in 2013 by building it on the subvention method and capturing more than 80% of the consumer durable financing market, augmenting the consumerism boom. The modern version of BNPL has acquired a Fintech twist with new-age platforms such as Paytm and BharatPe following suit and offering loan products through apps that are wildly popular. The phenomenon has also gained significant popularity over the past decade in the West, spanning Sweden to Australia and the US to the UK – the US had more than 8 million total monthly users as of December 2021.

A market with an astounding potential

Currently, almost 250 million Indians make digital spends through apps and e-commerce portals – a number estimated to reach 500-600 million by 2025-26. And this is the BNPL target customer group. The proliferation of both BNPL players as well as credit seekers seems to have turbo-charged the market, causing exponential growth. A RedSeer report estimates the current BNPL market in India to be worth $3-3.5 billion and expects it to clock a staggering $45-50 billion by 2026. Another recent Fintech report by RazorPay suggests that the Indian BNPL market grew 637% in 2021 against a 569% growth in 2020.

While a host of new BNPL platforms have sprung up in the Indian market, several existing payment platforms, major e-commerce players, and digital wallet operators have also built a BNPL offering on top of their existing business. Some prominent names include Paytm Postpaid, MobiKwik, Freecharge, ZestMoney, LazyPay, ePaylater, CapitalFloat, Amazon Pay Later, Flipkart Pay Later. Even traditional banks like HDFC Bank, ICICI Bank and Axis Bank are jumping onto the BNPL bandwagon.

Unlike traditional bank loans (like home or personal loans), BNPL is a small-ticket point-of-sale product, typically less than INR 25,000. And although their quantum is low (only 0.7% of loans by value for banks), the number of BNPL loans disbursed is high (37% of loans by number for banks).

So, what’s the worry?

BNPL was originally developed to cater to the underserved and unserved section of the population. Today, more than 50% of the borrowers on BNPL platforms are new-to-credit first-time borrowers without a credit history and usually shunned by banks.

Industry experts say these new borrowers typically avail BNPL offers without disclosing other short-term loans they have amassed. Consequently, many new-to-credit borrowers end up being over-leveraged through multiple credit lines and regulators are increasingly worrying that young borrowers are getting in over their heads. BNPL seems to be fueling a culture of debt – household debt in India as a percentage of GDP increased from 30.1% in 2017-18 to 37.3% in 2020-21. The massive influx of private equity capital into the BNPL space is forcing these players to adopt an aggressive stance to build their portfolios and edge out the competition. This is further aggravating the unrelenting desire of bridging the gap between affordability and aspirations.

Parameters that BNPL players primarily rely on (usually e-commerce and e-payments history) for assessing a borrower’s creditworthiness are very narrow and grossly inadequate. Predictably then, the delinquency rate in these new-to-credit customers is higher than the average rate in an unsecured portfolio. While on one hand such easy access to credit might create a debt trap for borrowers, lenders too, run the risk of high NPAs as they largely cater to first-time borrowers with no credit history. By some industry estimates, BNPL players in the Asia-Pacific will face a combined loss of $5.2 billion by 2025. Losses are more aggravated for players in emerging markets, given their focus on long tail, unbanked or underbanked consumers.

Regulatory oversight on BNPL platforms has become increasingly stringent in the last few years on the back of excessive and unregulated lending, inadequate collection frameworks, absence of credit history, customer data privacy and flourishing illegal lending. In Nov 2021, the Reserve Bank of India constituted a working group for digital lending, which found that 600 out of 1,100 lending apps on Indian app stores were illegal. The working group also recommended treating BNPL arrangements as balance sheet lending.

The potential for growth that is built into the very fabric of this product is also leading to dizzying valuations of BNPL startups.

Concluding thoughts

Despite a staggering growth potential, huge capital influx in the sector and an enormous target customer pool, BNPL players need to stop cutting corners while instituting borrowers’ creditworthiness. Experian has recently announced plans to debut a BNPL credit bureau to provide real time data on borrowers’ spending and loan repayments pertaining to BNPL-specific debt. Such measures can go a long way in building a solid regulatory foundation for the sector.

A certain amount of avarice is perhaps nested within the human DNA. The key lies in not allowing it to become paramount in our lives. Borrowers must recognize and realize the clear risks of taking on too much debt without due regard to their ability to repay them. They must also ensure that the apps they use to avail BNPL products are being offered by a licensed lender.

The potential for growth that is built into the very fabric of BNPL is almost dizzying. But consumers must realize that there is no free lunch – if there’s a ‘zero percent’ on offer, there is certainly someone else who’s paying for it.

Author: Prithwijeet Mukherjee,

Sr Consultant, Strategy Consulting

Image credit: Times Group