India is certainly a land of contrasting values and our financial ecosystem is no exception to that. Terms like “loan” and “credit” are frowned upon and “ you should only spend what you earn” is engraved in the mindsets of a vast majority of our population. For decades, financial inclusion in the country has been a priority for policymakers and it has taken shape in the form of various initiatives.
For instance, under the Pradhan Mantri Jan Dhan Yojana, more than 40 crore bank accounts were opened by 2020, with over half of these being held by women. But financial inclusion doesn’t just mean having a bank account. Without financial empowerment, having the tools like a bank account is meaningless. Financial inclusion encompasses access to other affordable formal financial products as well, such as insurance and credit. In this respect, India is still on a fairly long path.
According to the RBI’s recently launched annual Financial Inclusion (FI) Index based on three broad parameters - access, usage, and quality of services - India’s reading stood at 53.9 for the period ended March 2021. We still have a long way to go towards financial inclusion that is effective as well as efficient.
Against this backdrop, Fintech companies made impressive strides in providing fast and affordable financial services, especially to those who were so far excluded from even the most common financial services, like cashless transactions, loans, and insurance. The innovative Buy Now Pay Later (BNPL) model being offered by new-age digital credit lending companies is now building a strong economic environment, providing much-needed support to the otherwise financially excluded population.
BNPL Offers Easy Access to Financing
Whenever the talk of financial inclusion has reached a crescendo, Fintech has risen to the occasion and ensured more individuals are brought under the financial inclusion umbrella. BNPL is the latest product that has come up in the ever-evolving product mix. It is making low-cost credit available for vast segments of new-to-credit and non-credit carded customers.
Growth during the pandemic
Following the onset of COVID-19, BNPL experienced a tremendous uptick with lockdowns and social distancing norms pushing people to access financial services online. The BNPL ecosystem matured in a record short span of time, thanks to the emphasis on cashless transactions. Fintech firms found it a natural extension of their existing product portfolio where they could partner with online merchants and retail marketplaces to offer the credit option at checkout. The quick turnaround that requires only a simple registration and real-time approval during checkout make BNPL a fast, easy, and convenient mode of financing sans the hassle of extensive paperwork.
BNPL- Preferred by aspirational, young shoppers
The smooth payment experience makes BNPL a heavily popular and preferred mode of financing to the large demographic share of millennials and Gen Z Shoppers looking for instant gratification. This segment expects flawless digital transactions and hassle-free turnaround to meet its aspirational goals and purchases.
Going Digital - The BNPL Way
The purely digital nature of BNPL makes it a very attractive lending option for Tier II and Tier III towns where it could prove vital in easing the financial burden for millions of families nationwide ahead of the festive season. For a large population of the country residing in these cities, no purchase is too small, and even the smallest necessity could carry an aspirational / luxury value. BNPL enables them to break down larger bill amounts into smaller, more manageable payments that they can pay over an extended period of time.
BNPL Improves Affordability
BNPL is not just an agile and swift payment solution, it has made purchasing products and services earlier considered out of bounds by the vast majority much more affordable. Fintech offering short-term microcredit at low cost or zero interest under BNPL offers has provided the much-needed paradigm shift in the way Indians are making purchasing decisions.
Pandemic did erode people’s purchasing power, and consumers needed a better way to fund their purchases, sometimes even daily essentials. BNPL provided much-needed support to the consumers by allowing them to spread their payments into smaller EMIs at practically no additional cost. Consumers lapped it up for everything, from big-ticket items to small ticket purchases. The access to easy credit and the facility to pay back as per their convenience gave them the confidence to keep their spending on par with pre-covid levels. Indeed, a win-win for all!
Facilitating Individuals with No Credit History
As a country, India and Indians have been credit-hungry for decades. The credit gap has widened significantly over the past five years owing to a plethora of factors, ranging from the inability of loan seekers to pledge collateral to dated credit underwriting methods that continue to be used by many. Credit card penetration is still shockingly low, at 0.02 per capita in India, versus 2.01 per capita in the US. The low penetration of credit cards in India can be attributed not just to stringent eligibility criteria, but also to customers’ lower propensity to apply for or use them. This creates a vicious cycle, wherein people are unable to access loans due to a lack of credit history.
In contrast to the traditional credit card and unsecured loan companies, BNPL lenders rely on alternate data sources for underwriting new-to-credit customers. This helps wide strata of salaried and self-employed individuals with access to point-of-sale credit and be integrated into the country’s formal financial ecosystem.
By lowering barriers to purchasing, BNPL is expected to remain a popular financing method. According to a Q4 2020 survey, the adoption rate of BNPL is expected to grow at a CAGR of 24.2 percent between 2021 and 2028. BNPL's Gross Merchandise Value in India is projected to spike to $52.8 billion in 2028, from $6.99 billion in 2020.
The pandemic-induced economic pressures have led to millions of families seeking increased access to credit. By blending small-ticket and short-term credit seamlessly into the digital payments ecosystem, BNPL is helping increase affordability and contributing to inclusive growth post-pandemic.
The author, Ankit Satsangi, is Chief Risk Officer at Capital Float. The views expressed are personal
First Published: IST