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Buy now pay later: The emergence of a new era in lending

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BNPL is an exploding phenomenon across the globe. It's driven largely by two forces, the first one is behavioral as we live in a society that thrives on consumerism.

India is one of the world’s largest markets when it comes to fintech Innovation and adoption.
One of the tools that these fintechs are using to accelerate their growth is the option of Buy Now Pay Later.
What  kinds of BNPL exist?
There are two kinds of Buy Now Pay Later options. One is the Interest-free option available to the consumer which is sub-vented by the brand. In this model brands bear the cost, this is because Fintech has enabled a sale for them which otherwise would have not been possible if the consumer did not have an incentive to pay it in installments at no extra cost.
The second kind of BNPL is where a customer has to pay a nominal amount as interest. The interest is nominal and the total amount is split into smaller installments, thereby making the purchase more affordable for the consumer.
Why would a customer choose this option?
The zero-cost EMI option is a no-brainer for financially savvy consumers. It allows them to conserve cash and better manage cash outflow.
The interest charged option is best suited for New To Credit customers, who are at the early stages of their earning lifecycle. Perhaps they just entered the workforce, do not have any credit history and their earnings are modest but growing.
They will avail this method from an affordability perspective and also invariably start building a credit history. If they pay back in time this will positively affect their credit score which will set them up for access to other financial products as their incomes and score mature.
A BNPL is most likely the first financial product most millennials will experience. This sets up a stage for responsible lenders and responsible borrowers
Why The Sudden Rise?
BNPL is an exploding phenomenon across the globe. It's driven largely by two forces, the first one is behavioral as we live in a society that thrives on consumerism.
Millennials and Gen Z want to own the latest gadget or enjoy an experience whether that be travel or eating out at a restaurant now, they don't want to miss out on any opportunity.
Secondly, technology advancement to make this offering more seamless. In India’s case, the maturity of the IndiaStack that enables seamless verification, authentication, underwriting, and delivery of credit all done in milliseconds at the point of sale has set the stage for mass adoption of BNPL.
To be honest, BNPL is not a completely new concept. It has been around for quite some time. In the previous decade, when you bought an appliance from a leading retail store and they offered a Zero-Interest-EMI, that was the genesis of BNPL.
Who Is Buying Now And Paying Later?
BNPL is ubiquitous in one or the other form. From buying a new tire for your vehicle to shopping for a new outfit. Consumers are being offered BNPL by all possible sectors.
However, the segment of the market that has benefitted the most out of BNPL is the millennials. The consumer-driven, credit-starved generation is always on the lookout for goods. And brands are always looking to expand their customer base through the BNPL structure.
BNPL options are live and growing on E-Commerce platforms, Retail stores, Movie apps, travel apps. This product is the foundation of embedded finance and is reshaping the credit and lending ecosystem.
The Challenge
BNPL in the end is a credit instrument and should be treated as such.
In a fast-paced economy, availing of credit has become easier than ever. Therefore, it is important to ensure that this new form of credit does not fall in the wrong hands.
Fintechs run the risk of overzealousness with their lending and possibly enabling a credit line for a borrower who would otherwise be considered underqualified. This would lead to higher losses and in order to recover the losses lenders in the past have resorted to hard collection practices.
It is crucial that the borrowers also realize that BNPL is not a payment method but a credit instrument. If this new form of credit is not respected by its borrowers, it will adversely affect their credit score.
The regulators could step in if this market overheats and clamp down on lenders and industry. Hence, it's important that both borrowers and Fintechs act responsibly and in the interest of the Fintech ecosystem.
The author, Naresh Vigh, is Cofounder at Kudos Finance. The views expressed are personal