What is Buy Now Pay Later (BNPL)?

BNPL (buy now pay later) is an unsecured loan service through which a customer or borrower is entitled to purchase a product on a current date and clear the amount either in lump sum on a future pre-determined date, or as per pre-agreed instalments. BNPL provides easy credit for customers and also helps galvanise commerce for merchant partners.

Why it is considered as the future of retail lending?

BNPL has been increasingly getting popular on account of a seamless on-boarding experience, extension of credit facility to New to credit customers (albeit smaller credit limits), low-cost structure (subscription fee, zero percent interest rate product) for the customer and facilitating easy repayments. The entire process can be completed by the customers in a few minutes and the credit limit is available instantaneously.

Millennials and Gen-Z are maximising the BNPL option, as they find it the most convenient route for effecting purchases on e-commerce portals. With BNPL in place, consumers are purchasing things they couldn’t earlier afford.

The partner merchants are benefiting as commerce on their platforms has increased to such an extent that high margin merchants are now offering interest subvention to their customers as they need to pay lesser transaction fee in comparison what they were paying to Credit/Debit card giants. 

Institutions offering BNPL products have enhanced their revenues on account of multiple income streams like finance cost and subscription fee and it helps them build a base of customers who will utilise credit products more extensively in the future.

A word of caution 

Access to easy credit can lead to impulsive spending. If credit is not availed judiciously, customers can be burdened on account of debt accumulation. Exercise caution and borrow only as per repayment capacity. BNPL would need to micro-manage portfolio risk. Internationally, astronomical growth in BNPL has invited attention from the regulators. Consequently, in India too, we can expect welcome regulation for this sector.

What’s next?

In the years ahead, the BNPL market is likely to flourish on an exponential trajectory, in tandem with the continuing rise of smartphone users (currently estimated at 800 million) and an increase in connectivity, especially in the tier II and tier III towns. As per RBI, the total number of credit cards currently in use are 65 million and it is estimated that unique card users are approximately 40 million. Given that online shoppers in India are a staggering 170 million, there is immense scope for BNPL in India. As a product category, BNPL can be extremely beneficial for all the principal constituents, especially in a credit starved country like India.