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The red flags around ‘buy now, pay later’ plans


With its hassle-free, zero-interest, short-term loans to make all kinds of purchases, India’s ‘buy now, pay later’ (BNPL) industry is attracting growing interest from consumers, businesses, investors and, lately, the regulator. About 22% of Indian consumers used BNPL in the last three months of 2021, according to a survey published last week by YouGov, a market research and data analytics firm. In terms of consumer adoption, India ranked third among the 18 countries surveyed. Further, 28% of Indian respondents expected to use BNPL in 2022, the most across countries.

The Indian industry and those tracking it are alive to this potential. Between 2021 and 2026, unique BNPL users in India are expected to multiply 10-fold to 100 million and total BNPL disbursements 16-fold to about $56 billion, according to HDFC Securities, based on its own analysis and reports by consulting firm RedSeer and others. An increase in both user base and product range is expected to power this growth. American fintech company FIS expects BNPL in India to expand from 3% of e-commerce market value in 2021 to 8.6% by 2025.

While BNPL is predominantly being used for electronics, lifestyle and fashion, and home furnishings, its range is expanding. Edtech is the top category in Mumbai for Zest, which offers BNPL plans. Travel is expected to evolve into a key category, prompting Paytm to tie up with IRCTC for ticket booking recently. Such growth, and operational practices, has attracted the attention of the Reserve Bank of India, India’s financial sector regulator. Tighter regulations could impact BNPL’s growth and profitability.

Risky Growth

BNPL’s growth comes from its ability to satisfy both buyers and sellers. Consumers get hassle-free credit, thanks to a less stringent KYC (know your customer) process and ease of checkout (for example, no OTPs). Merchants have reported a higher conversion rate and a higher average shopping cart value. In effect, BNPL has expanded the market by bringing in consumers without a credit score or with low credit scores, with fintech firms leading the way.

The concern is the BNPL convenience could nudge consumers to overspend. According to a November 2021 report by an RBI working group on regulating digital lending, BNPL accounted for 37% of loans disbursed by banks via digital channels and 12% by non-banking finance companies. In value terms, it was less than 2%. At present, citing zero interest, lenders keep BNPL exposures outside their balance sheets, a practice the RBI panel has recommended changing. Further, with India’s data protection bill still in limbo, there are questions about data collection practices.

Tight Margins

Tighter regulations could dent the profitability of BNPL by increasing their cost of operations. As it is, profits are elusive for BNPL players. High credit cost is one reason. In a recent report, Macquarie said that BNPL and digital lenders in general pay a higher credit cost and the ticket size tends to be lower. The ticket size is about 3,600 per transaction for credit cards, 1,800 for debit cards, and about 700 for BNPL players such as MobiKwik and LazyPay. Besides, competition is increasing: there are over 1,100 lending apps, as per RBI.

It’s not just an Indian phenomenon. For example, Sweden-based Klarna, one of the largest BNPL players, reported an operating loss of about $658 million on revenues of $1.38 billion in 2021. None of its competitors—AfterPay, Zip, OpenPay (of Australia), Affirm, Sezzle and Splitit (US)— has reported profits last year.

Beyond BNPL

Despite looming regulatory pressures, and no clear path to profitability, BNPL retains a positive outlook. The bullishness comes from a playbook that has worked for many digital players: build the user base, leverage user data to offer more services that are also profitable. “With limited revenue drivers of profitability, several BNPL players globally are now gradually moving towards traditional products such as virtual credit cards, digital savings accounts (with debit cards) etc.,” according to HDFC Securities.

It might well be the path for Indian BNPL players too. India’s household debt-to-gross domestic product (GDP) ratio is low. There has been more activity in credit cards in recent months, though on a low user base. By various estimates, the number of BNPL users will overtake the number of credit cards by 2026 (100 million versus 70 million). However, by that time, BNPL and the credit card industry might be more entwined than it is today.

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