How BNPL Startups Are Disrupting India’s Lending Space, for Better or Worse
If you’ve bought anything online recently then you might have noticed the option to buy now and pay later and this is becoming pretty prevalent across e-commerce websites and apps but you might have even noticed this option being offered in offline locations too like stores and malls and for a lot of people this option is really really useful because normally you’d have to save up you’d have to put money away every month until you could afford that shiny new expensive thing that you want to buy and nobody wants to do that especially if it’s on sale right now and maybe won’t be in a month or two we want things today we want to buy them now and pay for them later and historically the solution to this problem was a line of credit or a credit card but of course in India getting a credit card isn’t always an easy process and once you’ve acquired one well then you’re being charged all kinds of fees and there are interest payments to make too suddenly you’re in debt and if you’re not careful that debt can take a long time to get rid of so either way the situation up until this point hasn’t been great either you save up for months or you go into credit card debt and that’s where buy now pay later comes in often shortened to just bnpl and the npl startups are taking the allure of paying for things later the same way that you would with a credit card and they’re making it easy simple and straightforward and earlier i mentioned shiny new expensive things smartphones laptops tvs but bnpl is starting to become available for everyday items too things like groceries and clothes and even restaurant food zomoto and swiggy are offering bnpl as an option now too and these kinds of use cases for bnpl are actually a major source of competition right now for traditional players in the credit space to the point where the predicted number of bnpl users in india by 2026 is a hundred million that’ll be almost seven percent of indians by 2026. now currently in 2022 credit card users account for a little more than two percent of india’s population that’s just 30 million credit card users which is still more than double the current number of bnpl users at 10 to 15 million but that number is increasing rapidly and so in this blog we’re going to be exploring the why of that why is this happening why is bnpl seeing such rapid adoption and will this be the end of credit cards here in india let’s find out right after this so if you haven’t already figured this out bnpl and credit cards are actually very similar in the idea and concept of what they’re offering credit cards are essentially buy now pay later cards and bnpl is a form of credit it’s not a credit card but it is a loan it’s debt in both cases you’re borrowing money from a third party be it a bnpl startup or more likely the financial institutions that they’ve partnered with or a credit card provider usually a bank the big differentiator here though between credit cards and bnpl is in their execution so if you’ve ever applied for a credit card here in india and especially if you own a credit card then you’ve probably gotten a call or an email from a bank salesperson telling you that you’re eligible for a new card congratulations now of course what’s happening here is that your phone number which is tied to your identity is now in circulation across most of the financial institutions in india and probably a couple of scammers too but it’s a very real possibility that if you decide to actually try and get one of these cards your application will be rejected despite the fact that the salesperson told you otherwise and that’s because in india getting a credit card is rarely as easy as the sales people make it out to be you have to be above a certain age there’s an income threshold that you need to cross which also means that you need a job with a proper pay slip and you’ll probably need to have a good credit score too which makes it especially difficult for new entrants into india’s credit market people living in remote parts of the country because they might not even have a documented credit history and the same thing goes for students or people who have just started in the workforce as an intern or they’re on a fresher salary and these measures are taken by credit card issuers to protect themselves they’re avoiding defaulters people who they feel are too high of a risk basically they’re keeping their npas their non-performing assets low by setting a high bar for their customers but once you are a customer once you’ve actually acquired a credit card well the struggles and challenges don’t stop there because now you actually have to pay for your credit card some credit cards have annual charges just to own the card it’s like a subscription but for the ones that don’t there are of course interest charges which can be exorbitant and then of course there’s also usually a myriad of fees for things like going over your credit limit paying your minimum late and advancing cash from your credit card to your bank account so taking all of this together all of these barriers to entry and all of these pain points for customers it’s really no surprise that a lot of indian people don’t want credit cards they’re a headache and if credit cards are a headache then buy now pay later might look like a ceredone or a discipline startups like slice zest money simple lazy pay and uni are lowering the bars that credit card issuers have set so high pretty much anybody can buy now pay later here in india and all you need to do is provide details like your pen and other number instead of relying on credit scores these bnpl providers use their own algorithms to determine how much credit they should give you based on your transaction history and your location and once you’ve been a bmpl customer for some time and as long as you’ve been in good standing and you’ve paid off your loans they’ll increase your credit limit too now another factor that’s worth considering is the timeline credit card companies expect you to decide when to pay off your debt they give you a minimum amount that you need to return to them at the end of every month plus interest of course but beyond that it’s up to you to pay off your debt and a lot of people struggle with that autonomy they end up paying their minimum without actually making much of a dent in the principal the initial loan amount before interest charges with bnpl though credit repayment is dispersed over a fixed period of time usually a couple of months through a system called emis or equated monthly installments and as long as you pay these installments every month your bnpl debt will be gone after a fixed period of time now does this mean that bnpl plans come without interest well yes and no it really depends on which platform which bnpl company you’re borrowing from oftentimes the longer the tenure of the loan the higher the interest rate becomes if you opt for a short term bnpl tenure of say between 15 and 45 days which gives you enough time to receive your monthly salary and if you pay this loan on time then you probably won’t end up paying any interest you’ve basically just stretched out a payment that would have been upfront and instantaneous over a multi-week time period but if you opt for a longer tenure say between three months and a year well depending on a number of variables your interest rate could be somewhere between 10 and 30 percent but this is made clear up front so that bnpl customers understand that this is the cost of spreading their payment out over an extended period of time credit card companies on the other hand give you the liberty to dig a deep deep hole for yourself one transaction made on credit here another there and then suddenly you’re struggling to make your minimum payments every month and your debt keeps on growing as your interest compounds so bnpl seems like the clear winner here right it’s a form of lending that understands people that’s tailored to their needs right well that’s the narrative that bnpl startups want you to hear but let’s take a closer look to try to understand how these businesses actually function how are bnpl startups making money we’ll start off with the end customer the one who will be buying now and paying later and they’re buying this item from a merchant who could be an offline merchant maybe a store owner for example or an online merchant maybe a d2c company or an ecommerce marketplace then we have the bnpl provider and they’re the ones who are providing the technology here they’re assessing the end customer using their proprietary algorithms and deciding how much to loan them but this loan isn’t actually coming out of their own pockets at least not most of the time instead these bnpl companies have partnered with financial institutions either nbfcs non-banking financial companies or fully-fledged banks so now finally we have the full picture the end customer the merchant the bnpl facilitator and the bank or nbfc now before we move ahead i do need to clarify some things because that diagram is simplifying things a little bit and it’s not always quite as straightforward as that diagram makes it seem yes sometimes you do have this straightforward structure where the bnpl provider is mainly focused on just that offering buy now pay later as a service and we mentioned some of these companies earlier slice zest money simple lazy pay uni but this isn’t always the case sometimes the bnpl company is an nbfc and this is just one of their many product offerings and sometimes they’re a fintech company paytm and moby quick for example offer bnpl and sometimes the bnpl provider is also the merchant flipkart or amazon have their own proprietary bnpl services for example so i just wanted to clear that up and make sure that we’re all on the same page here and now let’s move on to the next question how do bnpl companies make money well there’s actually a couple of sources of revenue the first comes from merchants like credit card companies and pos providers bnpl companies charge merchants anywhere between two and eight percent of the purchase amount now the merchant is okay with this because of the benefits that they see from partnering with the bnpl provider firstly they see an increase in conversions and average transaction value because customers that probably wouldn’t have been able to afford big ticket items in their store or marketplace now can so basically tying up with a bnpl company gives merchants more customers who spend more money and the best part is that they don’t actually shoulder any of the risk here the bnpl company pays them right away on behalf of the customer so those monthly emis that the customer is paying don’t go to the merchant the merchant has already been paid in full instead the end customer pays the emis to the bnpl company who is taking all of the risk in their hands but what happens if the end customer can’t keep up with these monthly emis well that’s where the second source of revenue comes in because many bmpl companies charge late fees according to bank bazaar these fees can be a percentage ranging from anywhere between two and eight percent of the principal loan amount or according to business today they can also be a flat fee somewhere between zero and 750 rupees usually sort of like a slap on the wrist to try to get these borrowers to pay up now it is worth noting here that some bnpl providers don’t charge late fees and the way that they protect themselves from defaulters is to start small they first offer a loan amount that they can afford to lose and then if the customer pays them back they slowly increase that customer’s credit limit if a payment is late then that customer’s ability to continue buying things via that bnpl platform is shut off and the customer’s credit score will also take a hit and then of course the third source of revenue is interest charged on longer 10-year bnpl loans and we already covered that earlier so let’s move on now to some of the issues that this market is facing and there are a lot of them and they’re pretty big too see there are many indian bnpl customers that don’t even know what a credit score is they don’t realize that by failing to pay off their bnpl debt on time they’re irreversibly damaging their financial identity they have no experience in the lending space they’ve never been a customer of a lending company and this is where we start to run into problems because as i mentioned earlier bnpl providers make it really really easy to get a loan even for people with no financial experience and very little in the way of financial self-control some of these people unfortunately have the potential to go off the rails spending more money than they can afford to pay back later without even realizing it of course bnpl players know this and their argument is that these are still early days they don’t have a lot of data to work with because credit penetration is so low in india and so they’re building models they’re slowly amassing this wealth of data on first-time indian borrowers and as they gain more insights they’re tweaking their formulas experimenting with first-time borrowers by giving them small loan limits to start off with and then offering bigger loans to trustworthy borrowers and flagging untrustworthy ones in other words they’re doing the groundwork required to illuminate the financial trustworthiness of a large untapped subset of india’s population it’s almost like a public service or at least that’s how they would frame it of course customers especially ones who aren’t technologically or financially savvy don’t care about these models this bird’s eye perspective means nothing to them when they find themselves unexpectedly in a sea of debt wondering how a seemingly innocuous buy now pay later platform got them there and wondering why nobody will give them a loan to pay off their other loan because their credit score which they didn’t know they had has now entered the red they panic and in some cases they lose hope of ever escaping the debt trap that they’ve fallen into this though of course isn’t something that bnpl companies are going to slow down for at least not without government intervention in fact things are only getting more heated in this space as more and more venture capital is being pumped in to buy now pay later startups to stay competitive bnpl companies need to onboard as many customers as possible by either making inroads into previously untapped populations of people in remote parts of the country or by poaching customers from competitors by offering them even easier loans and this has resulted in a situation where with a shockingly small amount of paperwork and no proof of income to speak of you can comfortably apply for bnpl from four or five different platforms and borrow upwards of one lakh rupees there are even instances now of bnpl companies not doing proper kyc or credit bureau checks they’re growing so fast that they’re unable to scale their due diligence and there have even been reports two of defaults not being reported to credit bureau agencies frankly things are a little bit out of control right now in india’s bnpl space corners are being cut and in the absence of any proper regulations unauthorized lending platforms are beginning to spring up for example earlier in 2021 there was a flurry of chinese lending apps that were using customer data and phone permissions to harass and humiliate customers into paying back loans at extreme daily compounding interest rates after an investigation the rbi found that out of 1100 lending apps in india 600 were illegal and while these definitely weren’t all bnpl apps these 600 illegal apps are a symptom of a larger problem right now in india’s lending space a throwing of caution to the wind by lenders and loan facilitators in favor of growth at any cost so coming back to one of our original questions here will bnpl overtake credit cards in india in terms of market adoption yes that is almost a given at this point the low barrier to entry for customers and the allure of being able to bridge the gap between affordability and aspiration is something that many indian consumers have never seen before it’s too good to pass up but at what cost is this happening are bnpl companies doing enough to ensure that their customers are able to pay off their debts bnpl companies of course will tell you yes but i’ll let you guys make up your minds on this one either way the space is growing rapidly it’s heating up there’s plenty of competition and more indians than ever before are experiencing the joys and sometimes the consequences of buying things now and paying for them later all right guys thank you so much for watching this episode of backstage with millionaires and i will see you in the next one you
Thanks for reading – What is BNPL or Buy Now, Pay Later ?