Imagine this: You are sitting on your sofa on a Sunday Afternoon and you want to order food from Zomato. You add your favorite pizza, with a combo of garlic bread and coke. You proceed to checkout and the first thing you hunt for is the discount that you can avail. On days when you are lucky, you would find a good solid flat discount on other days you might not. But through that uncertainty, certain features remain constant: Lazypay, Slice, Simpl, Jupiter and Postpe offering you wonderful discounts if you choose to pay through their services. Their service of Buy Now Pay Later. Why does Amazon Pay give you a flat 100 rupees discount if you use their Amazon Pay Later services? Why have these services mushroomed and are wanting to attract us?
BNPL or ‘Buy Now Pay Later’ is a type of short-term financing scheme which would allow the buyer to pay in installments by the end of a stipulated time. That is the plain vanilla finance textbook definition of BNPL, but there’s so much more to this concept than just that.
Where did this wave come from?
India, just like every other country faced dire consequences of the pandemic and like a lot of things the financial landscape of the country has also changed. Except for the 1% of ultra-rich Indians whose wealth grew over the course of the pandemic, the others faced a financial crunch. Step in BNPL. Indians turned to BNPL for not only their ‘needs’ but also their ‘wants’. From washing machines to trips to Maldives, BNPL was helping Indians get what they want.
But don’t you confuse BNPL for credit cards. There’s a LOT of difference between the two.
The only similarity between credit cards and BNPL is that they offer deferred payment options to the borrower. But there are significant differences in these two credit offerings.
Advantages: Ease of Access, Shorter timelines, lower costs
Disadvantages: No Universal Acceptance for BNPL, Lower Credit Limit
Who’s using BNPL?
While the service is being used across all age groups the adoption of BNPL was pioneered by Gen Zs and Millennials. According to reports for 2021, most of the customers were in the 23-26 years groups.
And other related services are starting to flourish around the BNPL ecosystem. Like Fampay, which allows teenagers below the age of 18 to get their own prepaid cards and start understanding how modern spending works. They offer rewards for each time a teenager spends money, which can be exchanged for gifts and discounts. Teenagers can use their own card to pay for food, go to the movies and every other digital point of transaction. This is starting to become an ecosystem and BNPL is only going to benefit from changes like these.
Not just startups like Simpl, Slice, Zest Money and Lazy pay but even traditional banks are wanting to get into this space with banks like HDFC lauching FlexiPay, ICICI launching PayLater and Axis Bank launching their own BNPL services. Not just the Banking Financial Service and Insurance Industry (another acronym BFSI) but also restaurant aggregators like Zomato and Swiggy have dived into BNPL and want to become NBFCs (yes another acronym, sorry, Non banking Financial Corporations)
Like Edtech and FinTech we now have LendingTech and this industry has found credit gaps in the traditional BFSI industry. With customers not able to splurge due to the pandemic there has been a lot of pent-up demand but not enough liquidity for that. With activities like shopping increasingly moving online and digital payments becoming the new normal, BNPL is here to stay in fact some say it is going to become a $500 billion industry in the next 4-5 years from about a $3 billion industry now.
The BNPL business model is based on a win-win-win model, which essentially means the borrowers get loans quickly, the lenders earn 10-12% average returns and the platform earns 5-6% for getting them on a common platform.
What’s the problem?
Although that’s not the end of it. The flip side to it is that such easy access to credit for anything and everything can lead borrowers into a debt trap. In a world where there are close to infinite things to buy, this might become a vicious circle. Technically and economically speaking, availing multiple loans, however small, will impact the borrower’s repayment ability and thus in turn affects the credit culture of the nation. There are no or little credit and background checks which means users can become NPAs (last acronym, promise, Non-Performing Assets) and default. There exist a lot of gaps in this system that is still trying to find its feet. The BNPL path ahead can be rosy but beware of the thorns until then enjoy the flat discounts that you get when you order food.