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How ‘Buy Now Pay Later’ is expanding India’s credit culture

·4 min read

Buy Now Pay Later (BNPL), a contextual credit solution, has huge potential in consumer credit in India due to its ease of transaction.

BNPL is likely to expand credit culture in a similar but limited way as UPI has expanded digital payment.

There are only 30-40 million active credit cards in India, which is just 3 per cent of the population. The ease of signing up for a BNPL solution, along with a quick and simple KYC to check eligibility in a matter of minutes, has made the BNPL solution popular.

How it works?

BNPL product across companies can vary a lot in lending as well as repayment models (2 weeks to a month/ repayment at one go vs staggered). Average ticket size varies from Rs 2,000 to Rs 10,000 to Rs 1 lakh.

A delay in repayment can lead to late payment charges of up to Rs 100 per day. Non-payment doesn’t affect the customer’s overall credit score—at most, the user profile is blocked until the payment is made. In the US, state laws don’t identify BNPL as a loan if the issuer is charging zero per cent interest.

BNPL companies tie up with both merchants and e-commerce companies to serve as a payment option. For merchants, this is a great way to drive up the value of transactions.

Most of the BNPL providers are available on the checkout of online shopping platforms like Amazon and Flipkart, food delivery players Zomato and Swiggy, e-ticketing platform BookMyShow as well as all the largest brands- online and offline.

BNPL is popular across categories such as electronics (laptops and smart phones), home appliances, fashion, healthcare, furniture, travel, etc. Most of the BNPL service providers partner with other lenders to give credit.

It is estimated that almost 20 per cent of all the digital transactions in India were converted into ‘pay later’ schemes last year. Razorpay saw a year on-year spike of over 150 per cent in the number of BNPL transactions it facilitated in November 2020. Local BNPL players include Pine Labs, Ola Postpaid Plus, ZestMoney, Capital Float, Simpl, PayU India, ePayLater, etc.

Some BNPL players use alternate data sets to judge potential customers’ repayment capabilities— including online behaviour, history with merchants that have tied up with the company, user’s phone models and more.

Comparison with credit card

Globally BNPL giants such as Afterpay (Australia), Affirm and Klarna have been very successful. But most of the volume here comes from customers who don’t have a credit card, i.e. they were expanding the consumer credit market, not cannibalizing it.

Logically, anyone who owns a credit card (and is reasonably sure he will repay on bill date), will never want to use BNPL.

BNPL interest rates are almost as much as credit card APR (Annual Percentage Rate) anyway, but with significantly higher credit costs.

While BNPL (ticket size ranging from Rs 2,000 to Rs 10,000 to Rs 1 lakh) might gain share for some big-ticket purchases, most consumers are likely to prefer to pay 1 or 2 credit card bills per month than multiple BNPL bills. Also, there is a lack of reward points in BNPL.

It is estimated that 40 per cent of the BNPL customers in India have a credit card. These customers have low credit card limit (30-35 per cent of credit cards have a credit limit of less than Rs 11,000).

The share of self-employed under BNPL is much higher at an estimated 60 per cent as compared to 30 per cent share within credit card. This partly reflects the bank’s hesitation in issuing a card to New to Bank (NTB), Self Employed or Near Prime or Thin File (Not Bureau Tested).

It also partly reflects that credit card issuance has been primarily concentrated in the top 10 cities, which has been a function of merchant acceptance infrastructure within these cities.

Debit cards and credit cards as well as Bajaj Finance have run a highly successful EMI program for years in India.

As per a Visa survey, avoiding an annual fee (64 per cent) and attractive rewards (59 per cent) are the two most important factors for consumers deciding which credit card to use. The key change now is the ‘digitisation’ of BNPL to online solutions.

BNPL is expected to provide access to customer segments below the income thresholds for credit cards, with a stronger focus on self-employed segments - thereby help create/ extend the credit culture (purchasing/ consuming on credit) instead of competing with credit card.

[Smahi Foundation has recently released its report, ‘Digital Payments in India’. The author is the Head of Research at Smahi Foundation and a public policy expert based in Mumbai. She tweets @Ritu_twt. Views expressed are personal.]


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