Two Sides of BNPL

The season’s new flavour is the ‘Buy Now, Pay Later’ fintech vertical. BNPL is a short-term financing option that allows for lending at the point of sale. Consider the ease of use it provides. You’re perusing your favourite e-commerce site when you come across a gorgeous blazer that is well out of your price range, and the e-commerce platform offers you the opportunity to buy now and pay later. And there’s more. There will be no interest charged throughout the brief duration of funding.

For many, the qualities of BNPL are game changers. Businesses, as opposed to consumers, purchase products and services in order to exchange them or add value to them before selling to consumers further down the value chain. MSMEs have uneven cash flows as a result of lengthier sales cycles, which is a barrier to efficient cash flow management. Businesses have been saved by BNPL. They can use BNPL to bridge the time between the lead time and the order delivery time. The payment service is also a powerful instrument for reviving business sales by increasing commission rates and average order values for merchants. On the other hand, BNPL is providing much-needed momentum to India’s financial inclusion. Credit facilities given by many banks that thoroughly analyse the background, capability, and prior credit behaviour before lending limit credit from reaching the people, which is where the convenience of providing BNPL becomes a saviour to financial inclusion. Given the tremendous influence it has had in a good direction, it is not surprising that firms are rushing to integrate BNPL into their current services through mergers and acquisitions. The financing activity for payments companies has picked up after the PayU-BillDesk merger. The transaction represented the greatest acquisition exit for an Indian firm. Square’s acquisition of Afterpay, or Amazon’s adoption of pay later alternatives, has ensured an increase in the growth of this sub-sector within the fintech business.

The widespread use of BNPL can be due to consumers’ widespread assumption that the service is less expensive than other market options. That may not be fully correct. On its website, HDFC Bank explains their BNPL product, FlexiPay: “No Extra Cost for 15 days has been offered as an upfront reduction to pay for interest levied by the Bank, thereby providing you the advantage of No Extra Cost.” The total amount you return to the bank will be equal to the order’s invoice amount.” If you want to use the BNPL plan for a lengthier payback period, generally more than 15 days to one year, the lender will give you equated monthly instalments (EMI) alternatives. You will be charged interest and a processing fee on your purchase at this location. Charges for this service vary from 12 to 18 percent interest plus a small processing fee. If you convert a Rs 5,000 buy into EMIs for six months at a rate of 27 percent p.a. interest, the total interest you would end up paying for this purchase will be Rs 401, bringing the total cost of the transaction to Rs 5,401. A loan’s processing costs typically range from 3% to 5% of the loan amount. As a result, if the processing charge is 5%, you would have to pay Rs 250 for a purchase of Rs 5,000 in products. For a purchase of products costing Rs 5,000 at a p.a. interest rate of 27 percent for a period of six months, you would have to pay a total interest of Rs 401 and a processing charge of Rs 250, making the total cost Rs 651 more, i.e., Rs 5,651. While the exact sum may not bother you, the yearly interest rate of 44 percent may.

Another misconception to dispel is the idea that BNPL and credit cards can coexist. Let us divide the BNPL market into two segments here. On the one hand, there are individuals with terrible credit, and on the other, there are people with good credit. A person with a strong credit score can simply obtain a credit card. As a result, they would only use BNPL services for two reasons: 1. Convenience of a transaction with no interest rate for a shorter length of time 2. Payment deferment: when they do not have enough cash and want to make rapid purchases through BNPL that will be paid back on time. The use case of BNPL for such a person is relatively restricted, but whenever they utilise it, the service providers will get their money back on time. However, in a market where credit cards serve the same purpose as buy now, pay later, facility providers will find it considerably more difficult to recruit brand loyalists. Now we’ll look at the second group of users. Someone with a low credit score or who does not earn enough to pay their expenses on time would be ineligible for a credit card, so they turn to BNPL. When they use the services for the first time, there is either a complete default that blacklists them or they wind up paying back the money. If the latter is true, keeping repayments consistent will be a tough nut to crack for this section. Why, you ask? Because their ineligibility for credit cards demonstrates a lack of finances to pay for the services they received on time. Making repayments during the typical BNPL term of 15 to 30 days is impossible for such a person. Even if they do make payments the first few times, these good borrowers will have their spending restrictions increased. New issues will arise expenditure restrictions are increased.

The BNPL offerings of various firms vary greatly. BNPL’s zero-interest offerings are typically in the range of INR 5,000 to INR 25,000. These are generally used to purchase lower-priced items such as clothing, food, and so forth. Credit limits for interest-bearing BNPL offerings range from INR 25,000 to INR 1,000,000. These are generally intended for higher-priced items such as televisions, cellphones, and so on. As consumers become more comfortable with the concept of BNPLs and make the initial repayments in order to reap the advantage of increased spending limits, default rates will rise. And when default rates rise, BNPL will plummet.

This is exactly what occurred in 2008-09. Investment banks, commercial banks, and different mortgage lenders recognised that lending to subprime customers with no credit history was a quick way to earn money. They thought that at any given time, the number of repayments would equal the number of defaults, and that by entering a new market, they would come out on top. That was obviously not the case. Repayment of loans has nothing to do with postponement of payment in and of itself, and with buy now, pay later companies doing no background checks on applicants’ credit histories, we may be in for another rollercoaster ride.

– Janvi Gupta

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