By Salman SH
India’s BNPL or Buy Now Pay Later market is estimated at $3-3.5 billion today but could potentially grow to $45-50 billion by 2026, according to consultancy firm RedSeer. The firm also estimates that the number of BNPL users in the country may touch 80-100 million by 2026 from the 10-15 million estimated currently.
Fintechs have been disrupting consumer lending in ways that private banks usually stayed away from. Traditionally consumer loans are largely focused on three use cases – personal loans, home loans and salary overdrafts – offered by banks. A new breed of fintech-based lenders are now taking this a step further by offering credit for small-ticket purchases like online grocery and food delivery, and other e-commerce categories.
The new emerging credit product offered by fintechs such as Simpl, LazyPay, PostPe and others are now seeing increasing demand from Gen Z and millennial users. In many ways, BNPL products are also turning out to be the first exposure to credit for customers in the age group of 18-25.
The BNPL model is structured similar to existing check-out financing options like debit and credit card based EMIs, but with a larger focus on smaller ticket purchases. Debit- and credit card-based EMI usually have an average transaction size anywhere around `10,000-30,000, but BNPL loans have an average transaction size of just around `300-600 with zero interest charges. The repayment cycle for BNPL is usually between 15-30 days, compared with 3-12 months in EMI products.
BNPL providers, including Simpl, Lazy, PostPe and others, usually acquire customers very early in their credit journey which means that they are typically new to the banking system. Hence, their creditworthiness is hard to determine due to lack of credit scores. This is where fintechs have an upper hand over banks, thanks to their ability to model alternative credit scores using transactional data acquired from online merchants, and user data acquired directly from smartphones and users’ social media profiles.
For instance, PayU-owned BNPL provider LazyPay builds a ‘social graph’ of users by aggregating data from a number of sources. LazyPay is essentially a smartphone app that provides pre-approved credit to users. It is offered as a checkout option at the merchant, for which LazyPay has direct partnerships with multiple online platforms such as Swiggy, Zomato, Dunzo, BigBasket, Practo, RedBus and others.
“Apart from using credit bureau data, we at PayU have built a social graph of consumers by looking at the different (online) merchants and retailers that a customer buys from and the kind of payment instruments that each user is connected to. Additionally, we also use smartphone-level data to underwrite users,” said Anup Agrawal, business head, LazyPay in an interview.
For users, BNPL solves the problem of affordability, and for merchants, it allows for better checkout rates, and a superior buying payment compared to other methods. Online platforms offer BNPL checkout directly on their payment page, which allows users to authenticate transactions faster with a single click compared to the tedious two-fact authentication process in credit/debit cards and UPI.
Bengaluru-based BNPL provider Simpl focuses more on the payment convenience factor by offering faster checkout and instant refunds in case the online merchant fails to deliver the order.
“Simpl’s BNPL is very much equivalent to the offline Khata, (credit account tab) that a consumer has with his or her nearby Kirana shop. We have virtually have zero payment failures and you can make payments without sharing a bank account, or UPI ID,” said Nitya Sharma co-founder and CEO of Simpl.
Sharma added that the BNPL Simpl platform process around 4-5 million transactions a month, which translates approximately to 100,000 transactions a day. In the last 12 months, Simpl has grown more than 10-times in terms of transactions. It currently works with over 5,000 merchants including across clothing, personal care, food/grocery delivery, and direct-to-consumer (D2C) brands.
BNPL providers make money charging a 2-3% commission from merchants for each transaction which allows these credit providers to offer zero interest on transactions. However, experts indicate that the very convenience factor of BNPL creates a high risk for the lenders in the long term.
According to a recent report by global credit rating agency Fitch Ratings, BNPL providers can be exposed to risks of “adverse borrower selection” since the genre of users who depend on small-ticket loans have very little financial headroom in case of adverse life events. Also, since these are young users they may get into impulse credit purchases over above their ability to repay, warned the agency.
“(Borrowers) attracted to the ability to split even small-value purchases into several monthly repayments may have only limited additional financial headroom in case of adverse life events…(Lenders) could underestimate a borrower’s debt level when underwriting new debt,” Fitch said in an October 2020 report.