The most important thing to bear in mind is: Principally BNPL is a credit product, and as a result, rewards customers that adhere to their repayment schedule.
Buy Now Pay Later (BNPL) has witnessed a tremendous uptick over the last 18-24 months. Designed to revolutionize the shopping experience of customers, this digital credit product is quickly becoming the preferred payment option for online shoppers in India. BNPL is especially appealing to young customers due to its low cost or no cost interest options.
Powered by the rising demand for e-commerce, BNPL in India is poised to grow more than tenfold in the coming years. As per research estimates, the market will expand from the current $3-$3.5 billion to $45-$50 billion by 2026, as an ever-growing number of online shoppers take advantage of the interest-free credit option.
What Does BNPL Offer to Young Customers?
The core appeal of BNPL is that it increases the purchasing power of customers, who can spread their payments into low-cost (mostly interest-free) instalments. This one-click credit facility can be availed at checkout on merchant websites and apps. Starting with e-commerce marketplaces, BNPL companies are collaborating with everyone - from food delivery apps and EdTechs to travel aggregators. Customers are using BNPL to finance the purchase of mobile phones, book flight tickets and also buy daily groceries.
Thanks to digital KYC and underwriting models, BNPL is able to offer a speedy checkout process and access to an instant line of credit for customers. This enhanced e-commerce checkout experience is appealing to a nation that is the most digitally dextrous country in the world.
Not only is India home to a large population of digitally savvy, young professionals, it is also credit-hungry. The country comprises a large population of new-to-credit customers, who lack access to formal credit. A 2019 study by TransUnion CIBIL revealed that only 147 million people out of 609 million people below the age of 24 were eligible to apply for credit. BNPL has universal appeal, but also addresses the specific needs and challenges faced by new-to-credit customers.
Alternative Data and Proprietary Algorithms Used for Credit Limit Activation
BNPL providers are leveraging AI, ML and automation to effectively solve for small-ticket lending at scale. The exponential reach also facilitates financial inclusion, as the product breaks geographic and economic barriers.
Increased mobile and internet penetration has provided huge opportunities to leverage data analytics to assess the risk profile of underserved borrowers. Multiple data points such as bill payments, purchase behaviour, social media footprint, and the likes are being used for underwriting purposes. Metadata analysis offers insights into a customer’s spending patterns and their intent to repay.
These alternative sources of data have allowed new-age credit models to determine eligibility of these borrowers faster, leading to the creation of an instant credit facility like BNPL. Further, as AI and ML are capable of processing large volumes of data in real-time, insights are generated faster than ever before. This has helped BNPL providers significantly crunch lead times.
Expanding Credit Limits on BNPL
The most important thing to bear in mind is: Principally BNPL is a credit product, and as a result, rewards customers that adhere to their repayment schedule. Customers demonstrating good repayment behaviour are gradually and systematically offered larger credit limits. On-time payment is viewed positively by lenders, who are willing to trust customers with larger credit lines.
Optimum use of the credit facility is also viewed favourably by BNPL companies. When customers utilize BNPL regularly, they often receive extensions on their line. Vintage too plays an important role. Customers who have been using BNPL for longer are typically offered an extension.
BNPL providers have a 360-degree view of their customers’ spending habits and borrowing behaviour to ensure responsible lending. Failure to repay is reported to the credit bureau, thereby dissuading bad repayment behaviour. Non-payment or late payment of dues impact the credit score of a customer, which compromises their prospects of loan approvals in the future. Customers with low credit scores may be offered BNPL, but given the risk involved for the lender, these customers often have to bear a higher interest rate. New to credit customers are offered smaller credit limits, to begin with. As they increase their usage of BNPL, the limit is gradually increased.
A global phenomenon, BNPL is revolutionizing online shopping in India. Customers are increasingly signing up for the product, experiencing the numerous benefits it offers. With an informed approach, customers can use BNPL to seamlessly address their needs and aspirations.
The author, Akshay Sarma, is CFO at Capital Float. The views expressed are personal
(Edited by : Anshul)
First Published: IST