Buy now, pay later? Behind the boom, caution is required | Latest India News
There’s a new dimension to attractive cash back and reward points on purchases, and it’s given if you sign up for a new payment option that lets you split your purchase or just pay later.
It was precisely the lure that prompted Dhaval Doshi, managing director of tech company Location Bank India, to get not one, but three of these cards. “With Slice, LazyCard and Uni, I get points and rewards on top of my credit cards. I now have tons of cashback to play with,” he says, adding that he immediately refunds the full amount owed.
Buy Now, Pay Later (BNPL) is a growing payment instrument in the country. Latest figures from fintech company Razorpay indicate that BNPL transactions grew by 637% in 2021 (with 104% annual growth in online payments), followed by 569% growth the previous year.
“Estimates show that the BNPL market, which is currently worth $3-3.5 billion, will grow to $45-50 billion by 2026. In addition, the customer base could also increase tenfold,” says Hitashi Garg, Vice President , PhoneShop at Cashify, a platform for selling used technology.
Driving the boom is pandemic-induced widespread acceptance of digital payments, easy knowledge of your customers’ requirements and credit background checks, and, most importantly, a deluge of cashback and rebates attracting new users. .
But experts now fear that some of this rush and ease of access could cause people to lose sight of their finances or foster reckless behavior that will ultimately lead them into debt traps.
“Over the past few years, we have seen a structural change in consumer behavior and the younger age group is not averse to buying on credit,” says Dhruv Jain, Managing Director of CASHe, a platform credit.
But, in the case of Joshi, for example, it is not without problems. “It doesn’t work for me because I don’t have any visibility,” says Doshi, who now finds it cumbersome to keep track of the due dates of different cards. “I like to look at my bank account and know what my liquidity status is.”
Basically, users can access BNPL payment options in two ways. The first is through new age credit cards. Transactions made on these can be split into equal repayment installments and often without additional interest. The second is to use payment methods built into shopping websites, such as LazyPay and Simpl, which are accepted by thousands of websites.
In the first category are Slice, LazyCard, PostPe and Uni cards. All four are issued on the Visa network and often bundle cashback offers that attract new customers like Joshi.
“BNPL started primarily as a solution to provide the convenience of deferred payment, like the khata system followed by general stores. Over time, it has evolved and now mainly comes in two avatars to serve two distinct purposes: convenience and affordability,” says Anup Agrawal, Business Leader at LazyPay.
Such methods make sense for merchants because they provide easy credit for small transactions, an ease that promotes consumer spending.
“BPL is seen as a revenue generator by traders. Without this, many end consumers will not be able to purchase these goods and merchants would see significantly lower conversions,” said Khilan Haria, Vice President and Head of Payments Products, Razorpay.
BNPL services are now integrated as a lending component and payment option on e-commerce platforms.
Growth centers: Indian small towns
So it’s almost intuitive that one of the main drivers of this growth comes from small towns in India, where credit card penetration is low. “At LazyPay, around 60% of BNPL demand comes from Tier 2 and Tier 3 cities, especially outside the top 10 cities in India,” says Agrawal.
At the heart of this is the ease with which it is possible to sign up for certain payment methods. “BNPL’s value proposition as an alternative to credit cards and the ability to serve users with poor or no credit history, lack of financial documentation and low cost credit requirements play a major role in the growth of the volume in small towns,” says Ashish Gupta, founder and CEO of Benori Knowledge, a research and analytics company.
Up to 46% of users deploy deferred payment options more than once a month, with the most common use cases being online shopping, food delivery and bill payment, according to the latest data from the Redseer consulting firm. “The Indian BNPL is estimated to explode to $45-50 billion by 2026,” says Varun Chopra, founder and CEO of Eduvanz, a fintech company.
There is also growing internet penetration, alongside the fact that smartphone adoption is booming. “Over the past few years, these cities have seen a sudden tech boom, with most people owning a smartphone. This has led to an increase in online shopping, helping cashless payment methods like pay later gain traction,” says Cashify’s Garg.
Financial stability, or lack thereof, during the coronavirus pandemic also played a role. “The pandemic has accelerated the need for access to formal credit at affordable rates, so consumers can manage their day-to-day expenses,” said Dheeraj Aneja, senior vice president and head of fintech and payments group, Flipkart.
Major shopping platforms like Flipkart and Amazon have implemented their own pay later options. Amazon Pay Later had already registered 2 million users in July last year. Flipkart says there are 100 million consumers who can access Pay Later, a base they want to activate and engage. Flipkart’s Aneja thinks the flexible repayment options are particularly appealing to students and those who may be currently unemployed.
The imminent dangers
It’s important to keep in mind that any line of credit can potentially impact your credit score. Consider each BNPL transaction as a loan. BNPL credit is not reported, processed and does not weigh on your credit scores in the same way as a credit card but like a loan. “We report your expenses on behalf of a consumer loan to the credit bureaus,” the Slice Card FAQ states. Uni also confirms that this allows you to “use the loan via card”.
In other words, when you sign up, you are essentially taking out a short-term loan.
For users who start transacting with BNPL products on a regular basis, there is a risk that they may not understand the possible long-term impact on their credit score which in India is recorded by four credit bureaus – CIBIL TransUnion, Experian, Equifax and CRIF. High rating. All lenders, including banks, check for a good credit rating before issuing loans and credit cards.
Cashify’s Garg isn’t confident that all users know what they’re getting into. “We can say that people’s awareness of the relationship between credit reports and the BNPL payment option is highly variable,” he says.
People may not have a full understanding of how credit scores are affected by the volume and value of loans taken out, as well as repayment patterns. “It’s a fact that buy now, pay later, like any other credit option,” he says.
Easy credit also presents the danger of overspending, especially when offered with minimal background checks. “Due to the availability of one-click credit and zero or soft credit checks on users, millennials typically overuse credit, leading them to fall into a debt trap or late penalties,” explains Gupta of Benori Knowledge.
Then there’s the danger that a user’s incomplete payment history will be reported to bureaus, which can negatively impact scores.