Remember? When did your friend reach out last to you for a friendly loan? It was not that he/she was moneyless, but lacked instant liquidity for some reason. Such hand loans used to be common among households one time (waned off these days, thanks to digitization). More than borrowing, these loans bonded trust and goodwill among the individuals. Taking a cue, perhaps, from this, companys are now launching BNPL (Buy Now Pay Later). Customers get an interest free payment stretch; and companies gain conversion and traffic.
Ms. Anusha Deshpande, fresh out of college, is employed at an IT company and draws a monthly salary of Rs. Fifty thousand. She shops online and is slowly upgrading profile of her household by buying items from Flipkart/ Amazon by initially paying a small amount and the rest amounts in instalments, later, once salary is credited to her account. Welcome to the world of BNPL and enjoying life, king size.
What is BNPL? Who is Offering BNPL?
Buy Now, Pay Later (BNPL) is a short-term credit facility enabled for customers to make their purchases online while arranging for the payment at a future date, without having to pay interest on the short-term credit facility. The interest free period offered by BNPL entities typically varies from 15 to 60 days while the credit limit ranges from Rs 500 to Rs 50,000—with a few extending credit up to Rs 1 lakh (1). The BNPL players in India are Zest Money, Ola Money, Flex Money and Flipkart Pay Later, to name a few . Traditional banks like HDFC and ICICI Bank are joining the BNPL industry with their own BNPL products.
BNPL Operating Model
Consumers, after their online purchases, pay in the form of instalments over a period of months, in an interest-free manner. The BNPL firms also make money by charging online retailers a fee for the services provided by them (2). The BNPL operating model on boards and offers lending services quickly, with no physical branch visit, and documents. Here’s how BNPL works:
- The customer initiates a purchase through online mode from a merchant.
- The customer chooses the ‘BNPL’ tab/ button.
- The customer makes a small down payment, margin amount.
- The remaining amount is recovered from the customer in the form of interest-free Equated Monthly Instalments.
The BNPL companies are compensated by the sellers, who pay a fee ranging from 3% to 9% of the purchased amount to them, when the customers opt for and pays in the BNPL mode. An interest ranging from 10% to 30% is charged by the BNPL players from the customers making the online purchases, the charge being dependent on the customer’s profile like credit score, repayment tenure, etc. Interest is not charged to the customer if he arranges to pay his instalments within time, else a late fee is charged to the customer when there is a delay in the payment of due amount.
What Happens In Case of Default?
If a buyer fails to pay the amount within the defined repayment window, the lender will charge interest on the unpaid amount and the buyer will pay hefty late payment fees. Any payment delays will be reported to the credit bureau which can adversely impact the buyer’s credit score. This could increase the cost of future loans, for the buyer and his future loan applications can be rejected.
Banks Risk Aversion to BNPL
BNPL provides easy access to credit, the purchases are discretionary in nature, the negative consequences being customers trapped in debt not able to repay the instalments. The BNPL products are targeted towards first time borrowers having little credit history, which may lead to non-performing assets (NPA) in the books of the lenders, when the borrowers default. The banks are already offering alternate products in the form of personal loans, consumer loans, credit cards and do not want to further increase their risk appetite, by offering BNPL services.
Regulator Views on BNPL
The Regulators around the world are concerned over the unregulated advances and they are coming down heavily on BNPL industry amid concerns over unrestrained lending, lack of credit history of buyers & privacy issues related to customer data protection. The RBI is keeping a close watch on the digital lenders extending BNPL schemes. The working group set up by RBI mandated the setting up of an organisation which is self-regulatory in nature & recognising BNPL financing as an asset in balance sheet of lenders. This would lead to compliance with know your customer (KYC) norms and checking with credit scores before BNPL product is extended to customers (3). The new financial services minister, of Australia, in June 2022 said that the Albanese government would push ahead with plans to bring buy now, pay later (BNPL) operators such as Zip and Afterpay under credit laws. In UK, Economic Secretary to the Treasury, John Glen, in June 2022 had said: “Buy-Now Pay-Later can be a helpful way to manage your finances but we need to ensure that people can embrace new products and services with the appropriate protections in place. By holding Buy-Now Pay-Later to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the UK.” In the USA, the US Consumer Financial Protection (CFPB) Bureau plans to start regulating BNPL companies due to worries their fast-growing financing products are harming consumers. Australia’s financial services ministry is pushing for regulation of BNPL lenders under credit laws.
Future of Lending
The BNPL products are thriving in India led by increase in adoption of e-commerce products, usage of digital payments, and the drive by fintechs. Credit to customer is easily available to customers, which has made BNPL, a preferred product for young millennials & new borrowers, who are traditionally not serviced by banks. BNPL players use data analytics & data mining to better understand a customer background and get bearings of the customers purchase behaviour, using which they fix the spending limit for customers (4).Millennials and gen-Z are quite keen on using BNPL over credit cards &consumer lending, as BNPL majorly involves a few clicks deal and provides quick customer service (no branch visit, documents, etc.). The transaction volumes in BNPL have increased USD 120 billion in 2021 up from just USD 33 billion in 2019, according to Global Data (4). Apple’s announced in June 2022 that it would launch its own deferred payments service. The Apple entry signals that Buy Now Pay Later is being increasingly seen as an attribute and not as an autonomous business & that the BNPL model will lead the future of lending.
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Can BNPL be the cornerstone for interest free consumer loans from banks? Why?
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2. Sanket Dhanorkar. Economic times article. (25/08/2021). 5 things to know about buy now, pay later schemes.
3. Naveen Kumar. Economic times article. (10/11/2021). Using Buy Now, Pay Later scheme for your purchase? This is what will happen if you default on payment.
4. Economic times article. (10/06/2022). Buy Now Pay Later business model faces test as rates rise.