Where is ‘Buy Now, Pay Later’ (BNPL) Headed? Here’s the Indian Context

Future of Buy Now, Pay Later (BNPL) in India

Buy Now, Pay Later (BNPL) has emerged as a disruptor for small-ticket credit-based transactions. In the past few years, BNPL has experienced tremendous global growth. It has emerged as one of the favoured payment methods among millennials in India.

This method of payment will remain popular among consumers who lack a credit history or have a low CIBIL score.

Before we dive deeper into the state of BNPL in India, let us first understand –

What is BNPL?

BNPL is a form of short-term lending instrument that enables consumers to purchase something right now and pay for them later, often with no interest. BNPL arrangements, also known as point-of-sale instalment loans, are quickly gaining popularity, particularly among those who shop online.

How does BNPL work?

A BNPL transaction involves three parties: a consumer, a merchant, and a BNPL service provider, which is usually a Fintech.

1. For consumers

Programs that allow you to buy now and pay later are not all the same. Each company has its terms & conditions, but in general, point-of-sale instalment loans work as follows:

  • You make a purchase from a participating retailer and select the buy now, pay later option at the checkout.
  • If you are approved (which takes only a few seconds), you pay a small down payment, like 25% of the total purchase price.
  • The outstanding amount is then paid in interest-free instalments.
  • You can pay by check or bank transfer. Or, payments can also be deducted automatically from your debit card, credit card, or bank account.

2. For merchants

Merchants are always looking for ways to raise the average ticket price of their customers. Besides that, e-Commerce merchants in particular frequently face abandoned shopping carts, indicating that the consumer did not complete the purchase after all.

Customers appear to complete a purchase more frequently and for larger dollar amounts when merchants offer BNPL, so there is a strong business case for merchants to take this option into account.

Extending credit at the point of sale necessitates the merchant underwriting the credit risk as well as the administrative costs. This is far less appealing than offering their customers this option in exchange for a fee to a BNPL partner.

Furthermore, because merchants already give up profit margin to Payment Processors for credit card transactions, switching service charges from one financial services provider to another (in return for a potentially higher average ticket price) is a compelling value proposition.

In other words, merchants subsidise their customers through this type of financing in exchange for increased sales and higher-value transactions.

3. For BNPL providers (Fintechs)

The financial services provider (lender) pays the merchant at the time of the transaction, taking on the ownership of extending credit and collecting payments from the customer over the BNPL term.

As both a payment processor and lender, BNPL providers assume the risk of consumer non-payment. To compensate for the risks, they pay merchants a percentage of the total purchase price. The lender then collects instalment payments from the customer in an amount equal to the full purchase price.

The lender’s primary source of revenue is the difference between how much they pay and how much they collect over the term of the BNPL. Fees are disclosed publicly and may range between 2.5% and 12.5% of gross merchandise volume.

BNPL providers are high-tech firms with large investments in platforms and infrastructure. They must provide compelling reasons for consumers and merchants to choose their services over competitors. Most use proprietary models to underwrite consumer unsecured credit risk and do not publicly release the approval criteria.

Because the industry is new and underwriting is largely automated, with some manual reviews for fraud, it is unclear whether the fees and interest they charge merchants and consumers adequately compensate for their credit quality.

Recommended Read: How India Paid in 2022: An Annual Overview of Digital Payments

What makes BNPL an attractive payment option among young consumers?

The high use of BNPL schemes by Gen Z shoppers in India is influencing e-commerce trends.

Several businesses have either altered their business models to accommodate this new trend or have devised alternative arrangements to meet the demand for BNPL by young consumers. Here are five of the reasons for its popularity:

1. Highly convenient payment method

The number one factor behind the popularity of BNPL and other quick methods which Gen Z and millennial consumers favour for online shopping is convenience. It only takes a few seconds to process such a payment, and the consumer/borrower can repay the amount later.

2. Lack of availability of alternative credit

Most banking institutions and traditional financial institutions do not lend to people who do not have a job or a good credit score. As many Gen Z and millennial consumers are first-time borrowers, they will not be granted a credit card or a loan unless their parents provide a guarantee to the bank.

BNPL products use alternative data and artificial intelligence to analyse a user’s profile and provide credit accordingly, allowing first-time borrowers to obtain credit.

3. Already existing integration

A QR code payment solution is also available in many offline stores, including Kirana merchants. Because many fintech apps allow this, users who buy offline can also take advantage of BNPL schemes.

The customer can go to any major store, recharge store, grocery store, shopping mall, or other location, scan the QR code card, and pay for it using a BNPL mechanism that is integrated with the buyer’s e-wallet.

4. Easy to initiate refunds

If a customer pays for a product online through an eCommerce portal and then cancels the order, the eCommerce company issues a refund, but not immediately. It takes a few days before the money reaches the consumer’s bank account.

When a customer purchases through a BNPL scheme and then cancels the order, the refund is immediate. The transaction is simply cancelled, and the responsibility no longer exists.

5. Convenient and interest-free EMIs

Most Gen Z and millennial consumers use BNPL for small purchases because it allows them to divide the cost into small EMIs that can be paid over three or more months of interest-free time. This has enabled people to purchase items that were previously out of their price range.

BNPL is expected to grow multifold in the coming years

Given the strong use case, new-age fintech companies and financial institutions are entering this space as it allows them to reach consumers who are unfamiliar with credit or do not have access to credit.

Adoption of BNPL has also increased among people with credit in metro and urban areas, as it allows them to make low-value purchases with the option to pay later, either in lump sums or in instalments.

Here are a few projections regarding the future of BNPL in India

1. BNPL transaction value to grow 779% by FY 25-26

BNPL Transacttion Values (in Billion)
Source: PwC

According to a study conducted by PwC, BNPL is expected to grow exponentially over the next five years. BNPL, which is currently valued at Rs 363 billion, is expected to grow to Rs 3,191 billion by the end of 2025-26.

2. BNPL transaction volumes to grow 953% by FY 25-26

BNPL Transaction Values (in Billion)
Source: PwC

BNPL users are expected to reach 202 million by the end of this financial year, with total transaction volume increasing at a CAGR of 67% since inception. It is expected to reach 2 billion by FY 2025-26.

3. BNPL revenues to grow 648% by FY 25-26

BNPL Revenue (in Rs Billions)
Source: PwC

With the increased adoption of BNPL, the revenue for Fintech is also expected to grow over the next few years. The total revenue will increase at a CAGR of 54% since FY 20-21. It will reach Rs 172 billion by FY 25-26.

Recommended Read: Growth of UPI Ecosystem: A Homegrown Technology Ready to Conquer the World

What’s next for BNPL?

To be able to reach the projected figures, BNPL needs to work on and improve the following core areas:

1. Delivering omnichannel experience via partnerships

As millennials continue to embrace BNPL, service providers must provide an omnichannel experience. Allowing a customer to pay with both a wallet and a card would necessitate partnerships with both in-store and e-commerce merchants.

Offers on the checkout page or use for large-ticket transaction categories like white goods and travel will increase product adoption even further.

2. Strengthening collection mechanism

As consumer adoption and usage rates rise, service providers and banks will need to fortify their collection mechanisms. Enabling a warning system to detect cases of probable default in advance and taking corrective action will aid in the administration of non-performing assets (NPAs) and achieve better profitability.

3. Oversight by the regulators and the industry itself

While the segment expands, it must be supervised by the regulator or the industry itself. This will not only allow service providers to operate safely but will also ensure customer education and protection.

Recommended Read: Rise of RuPay Cards: Why this Indian Indigenous Card-Based Payment Solution is a Massive Success

Regulations backed by technology will shape the future of BNPL in India

Regulation will have a significant impact on the advancement of BNPL and the advent of new technologies and products, bringing with it fresh challenges and opportunities. Hence, businesses must possess the right technology to power their products so that they can compete and gain a sustainable competitive advantage.

Payment fraud systems, for example, must be able to analyse data in real time and produce reliable credit risk analytics capabilities. Also, machine learning algorithms must be put to use for developing new credit and risk models, and for providing a seamless and secure consumer experience while increasing affordability checks to protect the consumer and enable them to make informed buying decisions.

Open banking can help businesses make more precise lending decisions and develop personalised credit offerings by sharing wage and income data.

As banks and Fintechs develop new bespoke and customisable solutions, consumer demand will accelerate the growth of instalment products.

It is already visible, as lending institutions are utilising significant amounts of consumer spending data that they already have to develop customised financial services products and super apps to assist consumers in better managing their lives.

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