Get what you want now, pay for it later, what's not to like, right?
A new credit model is taking shape in the country, a simple small-ticket loan that powers online, and sometimes offline purchases with the click of a button. It is the rise of the buy now, pay later (BNPL) phenomenon - that's on top of mind.
The good old "khata" systems were there at local kirana stores for regular customers, the ones where one would keep the tab in books, buy daily provisions and pay later at some point. This BNPL system is not much different, except that the "khata" has now moved online.
Signing up on BNPL is extremely easy - the loan doesn't come with a hefty price tag, in fact, no interest in most cases. It is digital, convenient and enables instant gratification with an attractive user interface. And, that is what millennials and Gen Z like.
What exactly is BNPL?
Simply put, Buy Now, Pay Later is a short-term financing service that is sold as a product allowing customers to spread out payments for a purchase, usually without any additional interest.
So, a BNPL company will tie up with e-commerce players like Amazon or Flipkart or food delivery companies like Zomato or Swiggy, or even travel booking players like MakeMyTrip etc. Then, it will allow customers to buy immediately and delay the payment by a few days or months, or repay the amount over several installments at no additional interest, so long as the customer pays up on time.
Sounds like a credit card product? Credit cards are indeed the original buy now, pay later product. They do have wider acceptance in terms of places where they work but a lot of people don’t have credit cards in India. Credit card penetration in the country is at an abysmal 3.3 percent or so and this 97 percent market is where the BNPL guys step in.
So, how exactly is the BNPL model different from credit cards?
Hidden charges are one of the big drawbacks of a credit card. There is no such baggage as far as buy now, pay later is concerned.
Also, banks would take a look at your credit history before issuing you a credit card. No such need when it comes to buy now, pay later medium.
Credit cards have a more flexible acceptance, BNPL services, meanwhile, are provided by select e-retailers and fintech organisations. Plus, the credit limit when it comes to BNPL is usually capped at Rs 60,000 on digital platforms. Credit cards usually have a higher threshold.
There is a standard interest-free period of upto 30-60 days in the case of credit cards but with buy now pay later, interest-free credit period can go upto 48 months.
Once you are past the interest-free period, you may have to shell out interest of upto 48 percent on credit cards. BNPL charges no extra interest, but they do charge a late fee.
One has the option of paying only the 'minimum due' amount on the credit card but if you are using buy now pay later services, you have to pay the fixed EMI on the scheduled date.
Also, credit cards give you the chance to earn cash backs on rewards, no such incentives on buy now, pay later.
Some of India's top BNPL players include LazyPay, Simpl, Capital Float, ZestMoney, etc and then there are the captive BNPL players that are specific to the platform, like Amazon Pay Later or Ola Money Postpaid etc.
So where are the banks?
While startups have led the charge, traditional banks held back from venturing into BNPL initially because of the fear of cannibalising their lucrative credit card business.
However, over time they realised that credit cards and BNPL can coexist and even complement each other. So, banks have now joined the party and are using buy now pay later to attract a new set of customers that have so far stayed away from credit cards.
Nitya Sharma, co-founder and CEO, Simpl, Amit Goel, India Head and Vice President of Prove and Vikas Bansal, Director of Amazon Pay, discussed this further with CNBC-TV18.
Sharma said there are about 900 million people with the bank account in India and they all have debit cards and UPI. “About half a billion people have smartphones with internet connectivity, and about 250-200 million people buy online but only 30 million unique people in India have a credit card. So, we started Simpl with a vision to reimagine the credit card in a way where its native to mobile and native to the internet,” he explained.
Goel pointed to the growth of the sector and said it is not just fintech companies but also broader tech companies and banks are getting into it. Given that it attracts a whole lot of users who do not have access to the credit cards, BNPL has provided a good means for people to be able to buy stuff, using this short-term revolving credit.
Bansal said, the trend observed in India is that because of the COVID-19 pandemic, customers are looking for a safe way to pay. At the same time, the emerging population of millennials and Gen Z, is looking at ways to extend their budget, manage their monthly expenses and fulfill their aspirations, he said. “So, we think buy now, pay later is an offering which is important and critical at this time for these segments of customers,” he added.
For the entire discussion, watch the accompanying video.