Do “Buy Now, Pay Later” Programs Threaten Banks / Credit Card Issuers?

The 2020 pandemic not only impacted the way shoppers went about buying products but also made retailers think about alternative ways of offering their products or services. As the virus became more rampant, cashless forms of payments (aka digital payments) became the preferred mode.

Among the many impacts of the pandemic, the “Buy Now, Pay Later” (BNPL) payment mode has been garnering more interest – in this time of unstable or uncertain incomes. Is it still early days or can BNPL challenge credit cards in the future? The immediate future looks promising. According to Medici Research, the Digital Lending market in India is expected to be worth $350 billion by the year 2023.

How does the BNPL digital payment mode work – and what are various opportunities and risks that it poses to the Indian FinTech sector? Let us see more.

What is BNPL – and how is it different from Credit Cards?

BNPL is short-term microcredit (or loan) that is offered for online purchases by retailers.  It allows shoppers to purchase products (or services) now and pay for them later with interest-free EMIs. Isn’t that the same as the “traditional” installment-based purchases? As Fintech entrepreneur, Antony Jenkins puts it, “BNPL is a point-of-sale financing scheme that has been in existence for over 100 years.”

So then, how is it different from using credit cards? Here are some differences:

• Zero-interest for timely EMI payments – unlike most credit cards.
• The due amount is sliced into 4 to 12 equal installments – that is only available on selected credit card transactions.
• No annual fees for the BNPL facility – unlike credit cards where you need to pay annual charges.
• Frictionless online shopping experience without the hassles of OTPs, online payment failures, or credit limits.

Next, let us look at some opportunities and risk factors for BNPL in today’s consumer finance sector.

BNPL – Opportunities for financial institutions

The BNPL option is largely used by younger Gen Z type of consumers – who are seeking an alternative to the traditional credit card. A research study conducted by Motley Fool reveals that 38% of consumers who have utilized the BNPL facility are in the younger age group of 18 to 24 years. Research also suggests that 76% of the consumers are likely to purchase if they are offered a simple and low-cost payment option.

At a time when there are still only 3 credit cards – every 100 people – in India (as compared to 32 credit cards in the U.S),  can BNPL penetrate the Indian market more successfully in the years to come?

It certainly looks promising. For instance, LazyPay,  one of the key players in India’s BNPL sector, has seen an increase in its customer base and is currently serving over 30 million. Another BNPL provider, Simpl saw a 40% increase in transactions for daily essentials supermarkets post the COVID-19 outbreak.

While consumers can benefit from deferred and interest-free payments, how is BNPL rewarding for online retailers and merchants? Like most credit cards, retailers pay a transaction fee of 4 to 8% to the BNPL provider. However, the difference lies in the fact that in any transaction, including the fraudulent ones, the merchant is assured of the sale and the due payment from the service provider.

Now that we have seen the various opportunities, let us look at some risk factors in the BNPL model.

BNPL – Risk Factors for Financial Institutions

Even though BNPL services are still in their nascent stage, traditional credit card companies can lose their consumer base. With large companies like PayPal entering the BNPL market, it is estimated that this market will grow by almost 400% by the year 2025.

With the increasing acceptance of BNPL, traditional financing companies are likely to be impacted by zero interest payments and lesser consumer loans. Adding to that, customer relationship with the millennial generation and overall profitability could take a hit – as younger consumers switch to flexible forms of repayments.

Companies that offer both BNPL and credit card services also face financial risk – when customers do not repay their dues due to a variety of circumstances. They build their repayment structure on the trust that customers will not default on their payments as they would not want a negative credit score.

For example, Capital One is one American bank holding company that offers BNPL facilities on their credit cards. With roughly 62 million credit card users, it earns revenue by charging merchants an interchange fee (along with interest and late fee) if customers do not pay back in time. The company recently announced that it would be stopping its credit cards from funding BNPL transactions.

Now that you know the risks and opportunities of the BNPL model, the question arises – does it need to be regulated?

Why BNPL needs to be regulated in India?

We have seen how consumers opting for the BNPL facility can purchase any product on popular eCommerce sites like Flipkart, Amazon, and Dunzo. Industry experts estimate that FinTech companies in India processed over 3 million BNPL purchases during the 2020 pandemic year.

Is it the right time to regulate BNPL in India? Considering its unsecured form, the answer is surely on the affirmative side. As an example, Gen Z consumers need to be educated on the long-term implications of the BNPL schemes along with their impact on their credit scores (in the event of non-payment of EMIs). The absence of any regulations can result in gullible consumers being influenced by “attractive” marketing schemes and campaigns.

Fintech-related regulations in India need to find answers to questions like:

1. Should BNPL companies be treated as NBFCs under the Reserve Bank of India, 1934?
2. Do they require separate authorization under the Payment and Settlement Systems Act 2007?
3. Do Fintech companies offering BNPL payments qualify for FDI under current rules?

While regulations are important, they must strike a balance with technological innovation so that the BNPL technology development is not stifled due to over-regulations.

Conclusion

BNPL can work as an alternative to credit cards, especially in markets where there is low credit card penetration. Even though BNPL will not “kill” credit card payments, it is a great tool to attract new consumers who want to escape the hassles of credit cards and prefer an installment-based mode of repayment.