Has BNPL Lost Its Sheen? Besides regulatory challenges, there are many more hurdles that come in the way of establishing a successful BNPL business

Fintech giant PhonePe backtracking from its plan to acquire ZestMoney in March this year left many doubting BNPL (Buy Now, Pay Later) as an effective business model.

The talks to acquire Zestmoney for $200-$300 million were ongoing since November 2022. The deal went off due to the latter's due diligence not meeting PhonePe's standards. While some deny the correlation between them, some say that BNPL as a business model is difficult to scale. In fact, ZestMoney has pivoted to a lending SaaS business model as well.

Why is BNPL not working in India? Before we answer that, a quick snapshot of the space.

BNPL: An overview

BNPL is a way consumers buy a product and make staggered payments in a time period of say 10-15 days and in some cases as no-cost equated monthly installments (EMIs) for three to six months. BNPL products are easily accessible at points-of-sale or e-commerce checkout and do not require any extensive paperwork. However, if a consumer fails to make the payment on time, interest charges are levied. Many players in the space such as ZestMoney, Ezetap, KredX, Amazon Pay, LazyPay, Simpl and Slice, came to the fore.

Overall, BNPL comprises no-cost EMI products on both debit and credit cards, pay later products (Flexipay, LazyPay, Simpl, etc.), and fully digital NBFC financing (ZestMoney, Bajaj Finance, etc). Additionally, BNPL for MSMEs is something that is picking up now.

What's wrong with BNPL?

BNPL raised a lot of eyebrows in the startup ecosystem. According to Experian, a data analytics firm, BNPL transactions in the country surged by 21 per cent in H1 2022.

Then, what went wrong?

"BNPL is a segment that has recorded strong growth over the last four quarters, supported by increased e-commerce penetration. However, with a lack of a long history and evolving algorithms, it may become a challenge to control default rates, especially during economic downturns," said Vinay Bansal, Partner, Physis Capital.

Regulations are also evolving in this segment as the RBI continues to design policies to ensure consumer protection and fair lending practices, which startups must adapt to. "But with the massive under penetration of credit in the country, such a model, if managed properly with appropriate risk mitigants in place, should provide great opportunities as a sunrise segment," he added.

In July last year, the Reserve Bank of India said that the BNPL model needs to be examined. It said that guidelines should be framed for this new product in lending. "BNPL services have developed into a new payment mode alongside the existing payment modes like cards, UPI, and net banking. This channel, facilitated by a few payment aggregators, leverages the existing nodal account (escrow account after authorisation) to route payments between a BNPL customer and a merchant. This novel method shall be explored." said the central bank in its Payments Vision 2025.

Besides regulatory challenges, there are many more hurdles that come in the way of establishing a successful BNPL business. "Firstly, revenue is typically generated through MDRs charged to merchants since many clients are offered 3-6 zero-interest EMIs. The MDRs are typically not high enough to cover the cost of capital and companies have to rely on high-risk customers for generating interest income," said Ankur Bansal, co-founder and director, Blacksoil Capital.

Further, experts say that such products are typically availed by customers with limited credit history resulting in higher delinquency rates compared to other lending ecosystems further making it difficult to attain profitability.

Research shows that 59 per cent of customers purchase unnecessary items through BNPL that they otherwise couldn't afford." High late and returned payment fees are the main disadvantage for the industry. According to a report by OkCredit, purchases in segments like apparel and jewellery using BNPL show higher incidents of non-payments because of higher ticket sizes," said Gauri Kuchhal, principal, Artha Venture Fund.

Overall, the BNPL segment is facing troubles not just in India, but across the globe with renowned companies facing challenges in raising further funds.