Customers tend to purchase their products with various options when they buy through an e-commerce website. This could be through the various debit cards the customer has in their possession, through net-banking accounts, or through cash-on-delivery where they would pay for their products in form of cash once they receive the product you can pay for it next month when you have the money to do so.
There is a new trend that is emerging by the name of Buy Now Pay Later(BNPL). Say you find a good mobile phone worth say 10,000 rupees, but you don't want to pay for it as it goes out of your budget for the time being (due to a cash crunch or whatever reasons it may exist). But say by opting for the BNPL alternative, the third-party BNPL company would pay the e-commerce site the 10,000 rupees and then you can pay the BNPL company the same 10,000 later.
There are various BNPL companies in India like Lazypay, ZestMoney, Simpl, MobiKwik, etc. Some companies, like Amazon in Amazon Pay Later and Ola in Ola Money Postpaid, have an intrinsic BNPL system built within them.
But then doesn’t it make you think, how do these BNPL companies make money in the first place, given the various instabilities associated with it potentially? How is it different from the conventional credit card? What is the market scenario of companies which offer the BNPL service in India? We will discuss all of these in this article.
How do BNPL Companies earn revenue?
BNPL companies make money mainly from two avenues:
Revenue from Sellers
For vendors, BNPL is an alternative payment method (others including credit & debit cards/wallets/Cash-On-Delivery) and thus, they have to incur a transaction fee like any other medium at a particular rate. However, a rate of 2-8% is higher than a normal credit-card discount rate, which is usually around 2.9% for e-commerce transactions and about 1 percent less for transactions made by credit cards in-store.
Thus, BNPL companies have to position their service offering in such a way that it convinces future customers of how enticing their service is, and this would further convince more vendors to buy into the BNPL service they are offering thus increasing the customer traffic.
Revenue from Customers
Most third-party BNPL providers do have their soft-credit checks to avoid giving money to people who have a poor record for repaying obligations, but this is not universal. Here is how BNPL provides monetizing from consumers:
1)Interest- This varies depending on the company. Some providers like Lazypay charge an interest of 10-30% on the “loan” amount, depending on the customer’s credit and duration of repayment. There are other organizations like Split in America which do not charge any interest rate as long as the installments are paid in due time.
2) Late fees- This forms a major chunk of the revenues of the BNPL organization (as high as 30%). Late fees occur when a charge is imposed on a customer for not paying the due amount on time and he thus has to pay later. Think of it like borrowing a book from a library, and then the various fines accumulated for not returning the book.
Difference Between Credit Cards and BNPL
In India, there are mainly three differences between BNPL companies and banks that offer credit cards.
1)Eligibility Criterion- Banks have more stringent criteria to give out credit cards (such as their CIBIL credit score, whether they are earning above a certain criterion or not). BNPL companies are relatively less stringent in their criteria. This helps many consumer segments, such as self-employed people and lower-income category sections.
2) Accessibility- Unlike credit cards, where you have to fill various online forms going through multiple levels of authentication, we can get access to the BNPL option through a one-stop authentication using our UPI ID. Another fact to be noticed is there is no waiting time to avail of the BNPL option unlike say credit cards, where we have to wait 2-3 weeks after applying for one.
3)Interest Rates- BNPL companies tend to offer an interest rate of around 28-30% and as mentioned earlier, interest rates are only applied when the customer opts for a longer duration of repayment. Whereas for credit cards, this tends to be way higher than 36-42% annually. Cases of high-risk borrowers do exist in which BNPL companies offer their services at interest rates similar to credit cards.
Scope of BNPL in India
Currently, as it stands, unlike other developed nations, BNPL in India is still in its infancy. But it has been widely speculated that it could take off in the future.
A market research firm by the name of Redseer estimates that India's BNPL market will stand at 45-50 billion dollars by 2026 from the measly 3-3.5 billion dollars as it stands right now. The research firm also predicts that the number of BNPL users in the country could rise to 80-100 million customers by that time, from the 10-15 million users it currently has.
As per Upasana Taku, co-founder of MobiKwik, "Only 60-70 million Indians have access to credit today, which means 93% of India has no access to credit”. Thus, there are a lot of opportunities to be exploited by BNPL companies in the Indian market, where millions of people have little access to formal credit. The poor access to formal credit has further been exacerbated by the COVID-19 pandemic.
These things can be noticed in the fact that about one-fifth of the revenue of MobiKwik is due to the BNPL transactions and there has been a 45x growth in BNPL transactions for MobiKwik. Similar trends can also be noticed in other BNPL companies.
Currently, the major obstacle is, unlike those behemoth banks that offer credit cards, BNPL companies can only offer a maximum credit of 100,000 rupees (which roughly equates to 1310.17 dollars). But this can be overcome as long as the reach of BNPL companies spreads all-over India, especially in the tier-2 cities and villages of India.
Thus, this article documents how BNPL companies get to make their revenue in India, how they are different from banks that offer credit cards, and what is their scope in our country. In a country where a lot of people are transitioning from the lower-income group to the middle-class group, this appeals a lot to the Gen-Z and millennials of our country. The more people get access to credit, the more they spend on various goods which leads to the growth of the economy.
Which are the BNPL apps in India?
Some of the best BNPL companies in India are:
- Paytm Postpaid
What is the BNPL market in India?
According to the Q4 2021 BNPL Survey, BNPL payment in India is expected to grow by 89.5% on annually. It will reach US$ 6927 million in 2022.
Which are the E-Commerce website that allows Buy Now Pay Later option?
Top e-commerce websites that provide the payment option of Buy Now Pay Later for complete range of products are:
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