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Will 'Buy Now Pay Later' Services Make Credit Cards Extinct?

Jul 31, 2021 3:31 AM 6 min read

There is a highly-acclaimed 1960s British film called Live Now Pay Later which deals with the ironic experience of a man who seduces people to buy on credit but dodges his own creditors. When asked to describe his customers, he says,

I can con them into buying a whole load of stuff they don't need and can't afford

The movie may have been emblematic of a post-war shift of Britain from austerity to thriving consumerism, but it parallels the present-day realities of consumer finance in many ways.

The viral growth of e-commerce today hasn't just puffed up the purchasing power and ability of people, it has also eased the process by giving birth to newer and edgier options of finance. What was typically a ‘debit’ transaction  is being increasingly packaged as a ‘credit’ one. The line between affordability and acquisition is blurring.

One of these credit financing options we have today is Buy Now Pay Later (or BNPL). To define in simple terms, it is a type of short-term financing that allows people to purchase first and pay later at an assigned date in the future, often with zero interest. 

So the most obvious question is, how does it differ from using credit cards? How does one qualify to avail it? How does it make economic sense for each participant? And finally, how much later can we pay? 

Let's see if we can answer all of these questions and walk you through some more details of the BNPL market. 

The Basics

Say, you are shopping on a retailer's website and are proceeding towards checkout. The retailer offers you the option to receive the product(s) right away but pay for it in full only after, say, 30 days or in smaller instalments over time. 

Third party lenders (mostly NBFCs or fintechs), also called BNPL providers, partner with the retailer and integrate their lending services into the checkout process. So, you're essentially granted a mini-loan at the point-of-sale itself. The customers can choose from a variety of repayment terms (sometimes even no-cost EMI) that best suit their budget and make those payments over time on either the provider's website or app.

Let's say you opt to pay through your credit card instead. The first difference here is that you have to pay the whole amount right away. How you settle your credit card debt later is an arrangement between you and YOUR bank. But in BNPL, the arrangement is between you, the retailer and the provider (which may not always be a scheduled commercial bank). 

In India, a host of BNPL players offer a mix of both deferred payments (with zero-interest) and EMI option (with low-interest). The EMI option is considered safer because the credit is underwritten by banks and NBFCs

The loans offered under BNPL schemes aren't collateralised (i.e. unsecured). Plus, approval is expedited by skipping a fine-print analysis of the consumer's financials (sometimes they determine the consumer's creditworthiness by looking at their SMS data). Naturally, chances of default are high. 

In fact, this is where the "zero-interest" utopia of BNPL is debunked. Consumers are charged an administrative fee if they are unable to repay the loans in the interest-free period. But for long-term delinquencies, especially for unbanked consumers, debt collection by BNPL providers could be tricky. 

Let us take a look at the nuances of the business model. BNPL providers are increasingly looking at merchants/retailers for monetisation rather than fees from the consumer. They would take a cut from merchants (anything from 20 to 50bps) for facilitating the transaction. For the merchant this makes intuitive sense on two fronts: i) higher conversion and ii) achieving this higher conversion while outsourcing the credit management. 

This is the value proposition that BNPL providers sell to merchants. While the regulatory framework around underwriting to customers for such transactions is still not entirely clear, it is clearly positioned as a win-win-win. Merchants clock more sales, BNPL providers make money on each transaction (presumably more than offsetting the cost of underwriting on a risk-adjusted basis) while the customers get the product without the initial capital outlay. Well, that’s the narrative anyway!     

This could also be a reason why the existing BNPL offerings are largely for small-ticket buys wherein the credit management of a customer can be fairly quickly established by a relatively small transaction while evading close scrutiny from regulators. Some providers have reported average ticket-sizes of ₹12,000 ($188) per transaction and emphasise that default level is in "very low single digits''. But in the absence of any industry-level data, this is tough to confirm. 


The BNPL Market

India's credit card penetration remains significantly low. The generational shift in attitudes towards credit (and the high costs/fees associated with it) has driven particularly young consumers towards innovations like BNPL. 

In addition to pureplay BNPL startups like PineLabs, Simpl, LazyPay, ZestMoney, ePayLater etc., even e-commerce players have begun offering their own BNPL services. There is a large addressable market for BNPL in India and it is growing fast, especially in some prominent categories like online retail, e-grocery, food delivery, e-health etc.

Fintech players like PhonePe (via Flipkart), Paytm (Paytm Postpaid) and MobiKwik (Zip) have also stepped into the territory. The BNPL business was a loud selling point in MobiKwik's IPO prospectus recently. 

According to the firm's estimation, India's BNPL market is on track to grow to $45-50bn by FY26. Plus, the BNPL user base in India is projected to surpass the credit cards user base by the same time (page 131, DRHP). On the global front, the higher end of estimates put it at as much as $1,000bn by FY25. 

Does this mean bye bye credit cards? 

Many would seem to think so. With the double whammy of BNPL and UPI, the e-commerce sector is gradually moving away from card-enabled payments. The frictionless one-tap checkout experience offered via BNPL has somehow added layers on top of layers of instant digital gratification that millennials and Gen Z are chasing after.

More than 60% credit card users in India end up converting the revolving credit on their cards into EMIs with a high rate of interest. BNPL, in comparison, has zero-interest EMIs and a nominal late-payment fee capped at a certain share of the principal. Considering that, the leapfrogging into BNPL options over credit cards wouldn't be a remote possibility. 

Inclusive Credit Growth

There has been considerable growth in BNPL services during the pandemic (PineLabs, India's biggest EMI platform, has seen 60-70% more demand since January 2020). This could be explained by an increase in micro-credit needs during an economic downturn. Consumer reliance on reliable credit solutions at the tap of a phone is what has propelled this growth story.

Traditionally, banks have shied away from BNPL due to the fear of cannibalising their own credit card infrastructure. It is only recently that many of them (ICICI, HDFC etc.) have partnered with BNPL fintech providers or launched their own to grab a share of the fast-growing market. The integration of banks could make the loan onboarding process more credible and inculcate better credit discipline. 

But at the core of maintaining such growth lies the task of improving a customer's financial literacy. With more growth also comes more hybridisation of the spectrum like BNPL apps turning into online marketplaces themselves. 

But most of all, polishing the debt recovery mechanism must be a priority for an industry whose growth absolutely relies on the overall credit development in the country. 

Let's wait and see how far the operational and support models are fine-tuned by the players in the sector in the days to come. 

