Buy Now Pay Later: Growth, Challenges, Revenue Model, and RBI Regulations in India

Anamika Mahapatra Anamika Mahapatra
Apr 21, 2022 13 min read
Buy Now Pay Later: Growth, Challenges, Revenue Model, and RBI Regulations in India

If you've purchased something online, you may have observed the feature to buy now and pay later, that's becoming increasingly common across e-commerce platforms. And you may have observed this feature in offline places as well, such as retails, and for several folks, this choice is very effective because usually, you'd have to save up until you could purchase that fancy new pricey item that you want to shop, no one intends to do that, notably if it's on sale now and won't be in a couple of months. We need things right now.

We wish to shop for them now and pay for them subsequently, and the typical approach was a form of credit or a credit card. However, obtaining a credit card in India is not always simple, and when you do, you'll be hit with a slew of interest charges. You are mysteriously in debt, if you're not cautious, that credit can take ages to pay off.

So, either you save for quarters or you go into debt, and that's where buy now pay later comes in. The BNPL startups are capitalizing on the appeal of paying for stuff later, just like you'd with a credit card and aiming to make it convenient.

I stated earlier about snazzy new valuable stuff such as mobile phones, tablets, and televisions, but BNPL is now becoming accessible for daily necessities as well. Groceries, apparel, and even diner food Zomato and Swiggy are now providing BNPL as an alternative, and these types of BNPL use scenarios are probably a major root of rivalry right now for existing companies in the lending space, with the expected count of BNPL users in India reaching million by 2026.

By 2026, this will account for nearly 7% of Indians. Cardholders now contribute to just over 2% of India's populace or 30 million, and it's more than twice the average of BNPL users, which is between 10 and 15 million, and that number is burgeoning.

What Sets BNPL Apart From Other Credit Cards?
How Do BNPL Companies Make Money?
Challenges Faced by BNPL Clients and Customers
RBI Working Group Report on Digital Lending
What Should Customers Be Wary of When Using BNPL Apps?

What Sets BNPL Apart From Other Credit Cards?

So, if you've not guessed, BNPL and credit cards are related in terms of the services they provide. Credit cards and buy now, pay later cards (BNPL) is a type of credit. This is a debt, not a credit card. You're deriving funds from a 3rd person in both instances. It could be a BNPL firm, one of the financiers with which they have affiliated, or a credit card issuer, which is typically a bank. However, the issuance of credit cards and BNPL differs significantly.

So, if you've ever applied for a credit card in India, or if you already have one, you've most likely received a call or an email from a bank salesman congratulating you on your new card eligibility. Moreover, what's happening here is that your contact details, that is linked to your identity, are now in circulation among most monetary organizations in India, as well as a few swindlers, but there's a good chance that if you seek to get one of these cards, your request will be denied.

Irrespective of what the sales representative told you, acquiring a credit card in India is seldom as simple as the sales representative makes it seem. You must be beyond a certain age, you must meet an income cap, which implies you must have a career with a decent payslip, and you must most likely have a high credit rating, which makes it incredibly tricky for novel applicants into India's lending market, folks residing in remote areas who may not even have a proven credit file, and same goes for freshmen who have just begun.

They're steering clear of defaulters. Folks they believe pose an undue risk. Essentially, they maintain their NPAs minimal by upping the ante for their clients. But once you're a client and obtain a credit card, the hardships and obstacles do not end there so you have to pay for your credit card.

Some credit cards charge a yearly fee only to own the card, close to a membership, but those that don't typically cost exorbitant interest and a slew of other fees for stuff like exceeding your credit line, reimbursing your minimum deposit late, and cash withdrawals from your credit card to your bank. When you add up all of these obstacles to entry and client pain points, it's no shock that many Indians dislike credit cards.

Brands such as Slice, Zest money, Simpl, Lazypay, and Uni are limiting the barriers that credit card companies have raised. In India, almost anyone can BNPL; all you have to do is offer information such as your PAN and Aadhar number. Rather than focusing on credit scores, these BNPL companies are using their algorithms to identify how much loan you must be awarded based on your previous transactions and site, once you've been a BNPL client for a while and are in good condition and have billed your loans, they'll also boost your spending limit.

Another element to take into account is the timeframe. Card issuers anticipate that you will decide when to pay off your loans. They offer you a monthly minimum payment that you should return to them, principal and interest, but again, it is up to you to pay back the loan, and many struggles with that freedom. They reimburse the bare minimum without creating much of a hole in the principal, which is the original loan value before interest costs.

With BNPL, credit payout is spread out over a set period, typically a month or two, using a process named as EMIs. If you pay these monthly installments, your BNPL loans will be paid off after a set period. Is this to say that the BNPL plans are interest-free? Both yes and no. It depends on the console and BNPL firm from whom you are accruing.

The longer the loan term, the larger the interest rate. If you choose a short-term BNPL tenure, such as 15 – 45 days, you will most likely avoid paying any interest if you pay back on time. You've essentially just spread out a fee that would've been made immediately over a period of several weeks. However, if you choose a longer time frame of 3 months to a year, your interest rate could range between 10 and thirty percent, based on a range of factors. However, this is made upfront so that BNPL clients are cognizant of deferring fees for a longer time.

Card issuers, on the other hand, allow you to dig yourself a big trench. One credit transaction here, another there, and you're unexpectedly trying to cope with minimum payouts, while your loans continue to increase as interest compounds. So, BNPL appears to be the clear victor here, correct? Isn't it a type of loaning relevant and personalized?

That's the story that BNPL fintechs want you to believe. But let's look closely at how these companies work.

Investment in BNPL Companies in India
Investment in BNPL Companies in India

How BNPL Companies Make Money? | Scope of Buy Now Pay Later
How do BNPL companies make money when various instabilities are associated with it? How is it different from the conventional credit card?

How Do BNPL Companies Make Money?

Let's begin with the final consumer, who is acquiring a product now and paying later from a vendor who is an offline vendor, such as a shop owner, or a virtual vendor, such as a D2C firm or an eCommerce storefront. Then there's the BNPL supplier, who is responsible for supplying the tech here. They examine the final consumer using sophisticated algorithms and decide how much to lend them, but this credit isn't flowing from their wallets, at least not most of the time. Rather, these BNPL businesses have teamed with lenders, either nonbanking financial firms or full-fledged banks.

So, here we have a true overview of the consumer, vendor, BNPL mediator, and bank or NBFC. Often the BNPL vendor is an NBFC, and that's just one of their many product lines, and they're often a Fintech firm, such as Paytm, which offers BNPL, and often the BNPL company is also a vendor, such as Flipkart or Amazon, which have their specialized BNPL solutions.

So the concern is, how do BNPL firms earn money? There are a couple of income streams.

The first one arises from vendors such as card issuers and point-of-sale (POS) providers. BNPL firms charge margins ranging from 2 to 8% of the original cost. The vendor is fine with it as they see the chance to network with the BNPL supplier. For starters, they experience a rise in conversions and an average deal worth because clients who previously could not afford high-ticket items in their shop or marketplace can now do so. So, partnering with the BNPL firm facilitates vendors with more clients who spend thousands, and the best feature is that they don't bear any of the risks.

The BNPL firm earns on behalf of a client. As a result, the monthly EMIs buyer pays do not benefit the vendor. The vendor has been fully paid; rather, the final consumer pays the EMIs to the BNPL firm, which accepts all of the peril.

And what if the end-users are unable to meet their monthly EMIs? Since many BNPL firms charge late fees, this is where the 2nd income stream comes in. As per bank bazaar, these fees vary from 2 to 8 % of the foremost loan balance, or they can be a fixed fee ranging from 0 to 750 INR.

To try to get these debtors to pay up, it's almost like a punishment. It's worth mentioning that some BNPL companies don't cost extra payments and instead prefer to start slowly to avoid defaulters. They initially give an amount owed that they can easily lose, and if the client repays them, their line of credit is gradually increased. If a payout is late, the user's ability to repeat procuring items through that BNPL site is revoked, and the user's credit rating suffers as well.

Challenges Faced by BNPL Clients and Customers

The industry is facing a lot of issues. Many BNPL clients still have no idea what a credit rating is. They are unaware that avoiding paying off their BNPL dues on time will permanently harm their fiscal identity. They have no prior loaning experience. They haven't been a client of a lender, and that's where we soon run into troubles because, as I previously stated, BNPL companies make it extremely simple to obtain a loan. Even for those with no previous fiscal expertise and little financial self-control.

Sadly, some folks can spiral out of control. Without realizing it, they are overspending than they can manage to cover later. Of course, BNPL parties are aware of this, and they argue that it's early in the season. Because debt users in India are low, they don't have huge data to deal with, so they're developing concepts.

They are steadily accruing a ton of information on first-time Indian debtors, and as they derive insights, they are reworking their equations, working with first-time debtors by starting with small loan confines and then providing larger loans to reliable debtors and identifying unreliable ones.

To put it another way, they're laying the foundations for enlightening the fiscal reliability of a sizable undiscovered segment of India's populace. It's like a public good, or so they'd describe it.

Customers, particularly those who are not tech or monetarily savvy, are uninterested in these concepts. This bird's-eye view means nothing to them. When they seek themselves suddenly in a sea of loans, they fear, curious how a relatively harmless buy now pay later forum got them there and how no one will offer them a loan to pay off their other line of credit since their credit rating, which users didn't realize they had, has now turned red. They may lose hope of coming out of the financial mess.

This, of course, will not cause BNPL entities to slow down. At least not without the government's help. Indeed, as more capital is poured into buy-now-pay-later businesses, the situation is only heating up. To stay viable, BNPL firms must connect with more prospective customers, either by entering untapped communities in remote areas or by poaching clients from rivals by giving them even simpler loans.

You can now adhere to BNPL from 4 or 5 multiple devices and collect up to one lacs with surprisingly fewer formalities and no payslips. There are even reports of BNPL firms failing to perform precise KYC or credit bureau checks. They're expanding so quickly that they can't extend their due diligence, and there have been reports of failures not being disclosed to credit bureaus.

To be honest, matters in India's BNPL space are currently out of regulation. Unapproved credit institutions are springing up in the lack of sufficient regulations. For instance, in early 2021, an influx of Chinese lenders apps harassed and humiliated clients into repaying loans at exorbitant daily escalating interest rates by using user information and phone authorization.

The RBI discovered that of 1100 lenders apps in India, 600 were illegal, while these 600 unauthorized apps aren't all BNPL apps, they are a manifestation of a bigger issue in the loaning space in India right now. Financiers and loan mediators are throwing caution to the wind in favour of expansion at any cost.

RBI Working Group Report on Digital Lending

The RBI's online lending working group is developing innovative forms for safer business exchanges. Although the online lending market grew 12x between 2017 and 2020, the RBI did not govern several of the new businesses, according to the latest study.

Typically, these companies and apps collaborate with banks and NBFCs to assist. As a result, prompt loans are becoming available at the expense of higher risk. It has also led to client excessive debt, legislative arbitrage, and high costs.

The report reveals such flaws while also offering a great structure for the industry. The study's pertinent points are explained below to provide a clear grasp of the proposition.

Differentiation among LSPs and BSLs

Loan Service Providers (LSPs) and Balance Sheet Lenders (BSLs) are separate entities (BSLs). LSPs are apps that offer clients borrowing choices. They don't get to be explicitly controlled, so they must collaborate only with governed financiers that can offer the assistance.

BSLs, on either hand, lend money and stably claim credit threats. They always are governed. This difference enables LSPs to handle the front-end expertise, whereas BSLs handle compliances and threats.

Ban On FLDG

An FLDG tool, or Ban On FLDG First Loss Default Guarantee, enables ungoverned companies to give credit to borrowers and claim credit risk. The study advised against using a trojan horse entry.

Many fresh lenders face difficulties because their systems are based on shadow lending. This part entails neo-banking and Defi (decentralized finance) concepts for a modal test. Innately, the study guides that only governed agencies should be allowed to take credit risk.

Supervisory arbitrage must be eliminated

The study recommends classifying all credit lines as credit instruments and eliminating supervisory arbitrage. Eg: most BNPL providers treat this feature as a purchase rather than a loan, and thus lack adequate KYC computation. They are unrelated to the credit bureau.

Client Protection

In some cases, the fees and rates are as large as 100%. The working group suggests a few steps to safeguard consumers from such practices. These are some of the suggestions:

  • Use a proper APR for all interest and fees.
  • STCC - must conform to relevant standards to avoid exorbitant fee rates.
  • Limit high-risk, very short-term debts with no tranches.
  • Recapitalization and over-indebtedness should be limited.

Insurers must also make sure that the LSPs associated treat debtors fairly, particularly in collection practices. To verify trusting clients and a healthy ecosphere, all forcible actions are avoided.

Data Security

The info is owned by the customer, not the institution. All critical loaning situations require clients' assent to use their data. This includes any e-commerce system that supports customer info to make underwriting choices. This improves data safeguards while retaining customer trust.

SRO And DIGITA

The study recommends that the RBI establish a Self-Regulatory Organization (SRO) to regulate operations and set guidelines. It also suggests developing DIGITA (Digital Trust of India Agency). DIGITA will meet the basic specifications for verification of conformance. Companies that have not been accepted by DIGITA will be considered non-compliant.


What is Buy Now Pay Later Business Model and Why e-commerce companies are adopting this model
As the Buy Now, Pay Later is growing and many companies adopting it. Let’s understand its business model and How Buy Now, Pay Later companies make money.

What Should Customers Be Wary of When Using BNPL Apps?

To begin, consumers must ensure that the app they are installing is from a licensed lender. If a firm does not have an RBI license, it must simply define under whose license it is selling products. Before installing, look into who is releasing the app, visit the site, and ensure it is a well-established and certified Indian corporation.

Second, if the firm is licensed, see if it explicitly shows this on its webpage, along with the RBI regulations that it adheres to, such as the grievance handling framework and interest rates. Furthermore, never install apps that request contact info because they are used for duress.

Third, while most BNPLs assert no charges or nil interest, you must learn the real loan amount. Even if firms claim zero percent, they are required to disclose their IRR – Internal Rate of Return – so buyers must ensure that the firm or app discloses all these for their safety.

Conclusion

BNPL is a valuable tool, but it should not be used for every acquisition a buyer intends to make or for daily purchases, as this would be over-leveraging oneself.

However, when handled efficiently and sensibly, the fact that rather than trying to make all of the payouts now or using a credit card to purchase, you are simply getting an option to acquire an item for nearly the same cost and drill down into 4-5 payouts is an effective device to have.

This is the benefit that BNPL firms provide, and it is the reason for the rapid acceptance because clients realize and require it. Buy Now Pay Later is an ideal, smooth payment system with vigilance on the part of the users and accountability on the part of the financiers.

FAQs

What are the risks of BNPL?

BNPL companies do not charge interest but charge high late fees which many consumers fail to pay and are later mounted in huge debt.

Is BNPL regulated?

No, Buy Now Pay Later companies are not regulated in India which has resulted in their growth and scams.

What is a BNPL company?

Buy Now Pay Later companies are companies that allow consumers to purchase the product and pay later in small installments.

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