The Rise OF Buy Now Pay Later BNPL is a win-win proposition for all in the ecosystem, but recovery in tier II is a challenge

BNPL (Buy Now Pay Later) has been making headlines ever since US fintech giant Square announced an all-stock acquisition of Australia-based Afterpay for $29 billion in August this year.

For the uninitiated, 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.

Some of the players in the space include ZestMoney, Ezetap, KredX, Amazon Pay, LazyPay, Simpl and Slice, among others.

What It Offers

BNPL is a win-win proposition for all in the ecosystem, say experts. The seller gets instant payment and increased cart value, increased conversion rates and overall footfall and the consumer gets affordable solutions that increase her purchasing power.

Thus, the BNPL space has been growing every day. For instance, Ezetap, a digital payments company, claims that it recorded a steep increase of 220 per cent (year-on-year) in the transactional volume of EMI in July 2021 compared with February 2020.

But how different is it from EMI in the earlier times? "EMI was earlier simply offered by the banks via credit cards for the purchase of smartphones or higher-priced products. Today, BNPL is an umbrella term for multiple fintech products that a customer can use to purchase an item, using one of the many credit line instruments available in the market," said Bhaskar Chatterjee, head of products, Ezetap.

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.

"For businesses who are selling to these MSMEs, be it other businesses or their own dealer/distributors/retailers, they can get instant access to capital thus eliminating their need to give credits to these MSMEs while doing more sales than before. As per market research, businesses selling to MSMEs can increase their cart values by up to 40 per cent while attracting 60 per cent new customers if they offer BNPL at the point of sale," said Manish Kumar, co-founder and CEO, KredX.

KredX and other startups in the space offer BNPL options that can be used by anchors/brands/businesses who sell to other MSMEs for providing instant credit to their buyers for any purchase with the brand at the point of sale. They can get the BNPL attached to any of their existing systems in less than a day with minimal tech dependencies, claims KredX.

Low Credit Card Penetration

India's credit card penetration is much lesser than its global peers and this has widened the opportunities for BNPL. "Though credit cards are one of the most lucrative products for a bank, the credit card penetration continues to be low in India compared to developed countries. This can be attributed to the conservative approach of banks that issue credit cards only to super-prime customers. Also, the high-interest rates and hidden costs have made Indians distrustful of credit cards," said Ankur Bansal, co-founder and director, BlackSoil.

BNPL products address both these issues by offering low to zero interest cost loans to a wider pool of customers who are underwritten not only based on their credit scores but on many other alternative data points.

"Credit card is the most expensive and a western model that possibly can't work for India. Around 500 million people use digital payments, many are taking to online shopping for the first time in their lives. BNPL being digital, can onboard them, approve new to credit customers using AI-ML and help them start their financial journey. BNPL tells you exactly what you have to pay and there are no foreclosure charges," said Lizzie Chapman, CEO and co-founder, ZestMoney.

Additionally, quick and equitable access to capital is a common problem. With the lower risk appetite of banks, numerous customers looking for short-term loans find it hard to get the required capital.

Further, the credit card penetration in India among MSMEs is even low. "Banks don't offer credit cards to MSMEs without a security deposit plus the entire process is so cumbersome. Even after having a credit card, the average credit period one can get is only 30 days, while businesses may take up to 90 days to turn over their inventory fully," said KredX' Kumar.

At the same time, BNPL offers customized offerings very unique to that business while providing different credit periods. Additionally, BNPL offers immediate payment realization to brands. "The brands can also choose to limit the usage of the provided limit to only their products thereby improving brand loyalty which lacks in the case of a credit card," added Kumar.

Other Factors Leading To The Boom

The pandemic has permanently affected the shopping habits of Indians. The increase in e-commerce penetration and online shoppers, particularly in tier II and tier III cities, presents a huge market opportunity to BNPL players. "The growing digital infrastructure and increase in acceptance of digital payments are also contributing to the boom of BNPL. Apart from this, the sheer convenience of BNPL products is also an important factor to its growing demand," said BlackSoil's Bansal.

He also added that BNPL products are available for very small ticket sizes where the efforts of employing a traditional loan product would not be feasible and also for large ticket sizes which make otherwise expensive purchases feasible.

Moreover, as per reports about 300 million people are expected to buy a smartphone for the first time in their lives in the coming years, thus leading to a huge demand for short-term loans. "The pandemic has also fuelled awareness among consumers and merchants about how a fully digital BNPL offering solves for both "access to credit' and "convenience of usage'. Applications have gone up by 5X on our platform, more merchants want to partner and make BNPL available at checkout, banks want to collaborate and drive the adoption too," added ZestMoney's Chapman.

ZestMoney has three offerings in the space including 30-day to 24-months ticket sizes ranging from INR 50 to even INR 5 lakh for high-end laptops, electric bikes and Edtech courses, 30-day offering for daily shopping needs and a 3-months offering for fashion, lifestyle products at 10,000 online and 75,000 physical touchpoints.

Additionally, the push from brands to make purchases more and more affordable for aspirational products is also driving the growth of BNPL offerings.

Further, it is a boost for MSMEs as the AI/ML models used by the startups in the space such as ZestMoney and KredX assess the creditworthiness of any MSMEs within seconds using multiple data points, unlike banks that take a lot of time. They also provide other benefits. For instance, KredX is helping vendors and suppliers of businesses with invoice financing and thus smoothening their upstream of the supply chain.

Disadvantages And Scope

The most prominent disadvantage for the players in the space is the delay in payments. The startups mostly cater to new to credit or low credit score customers and underwriting models need to be extremely robust for dealing with such a customer base. "Delays in payments or defaults if any tend to be towards small ticket size loans is a disadvantage. Collections for such cases might become unfeasible especially if the customers are in tier II and tier III cities. Apart from this, the growth of this segment might attract new regulations," said BlackSoil's Bansal.

However, the benefits weigh higher than the disadvantages. "Many more players are expected to jump on the BNPL bandwagon and create sector-specific offerings and differentiate themselves basis ticket sizes, tenors, merchant network, etc. Also, banks who were earlier seeing BNPL as competing with their credit card products are now venturing into the segment to tap into new customer pools," Bansal added.

While the current focus for many players has been the e-commerce segment, there is still potential for BNPL to penetrate other markets like food delivery, mobility, healthcare, education, others.