The New Rage in Finance: Buy Now Pay Later (BNPL)
Published by Sharekhan Education | March 22, 2022
The New Rage in Finance: Buy Now Pay Later (BNPL)
By Amit Pathak | Sharekhan Education
A lot of us have this peculiar habit of adding products to our carts on various e-commerce platforms, like Amazon. But did you know around 70% of us never go ahead and make the purchase even after filling up our carts? BNPL companies like Lazpay, Simple are looking at this as a business opportunity. They now provide the option of a one-click check-out without the requirement of OTP or PINs. BNPL is a short-term unsecured credit service through which customers can purchase a product on the current date and clear the amount either in 15-30 days or in instalments. It is effectively point-of-sale funding.
BNPL vs. Credit Card
One must have a good credit history to avail of a credit card and getting approval for one isn’t easy. On the other hand, BNPL involves a simple sign-up and very minimal credit checks. BNPL is accepted as a mode of payment by select e-retailers, whereas credit cards have much wider acceptance and offer a higher credit than BNPL. For BNPL, the overall shopping usage is limited to an aggregate of Rs 60,000 a year.
How BNPL Companies make Money
BNPL companies make money from both sellers and consumers. BNPL providers retain a portion of the Gross Merchandise Value (roughly 1%-2.25%) as a fee that the merchant pays to the BNPL entity. Transactions are usually low ticket (<Rs 5000) and have a high repeat frequency (food delivery, grocery, etc.). BNPL players also make money from customers by converting the purchase into EMIs, processing fees, and other fees (such as service, late payment, etc.) And so long as the amount is paid back in time, no interest is charged.
Pros of BNPL
Setting up a BNPL account is simple and barely takes a few minutes. BNPL services appeal to a large customer base because of low acquisition costs and a simple transaction process – a win-win for both merchants and BNPL providers. The BNPL user base is expected to witness rapid growth with rising internet penetration and e-commerce growth.
Cons of BNPL
BNPL may encourage impulse spending by the consumer. With the BNPL framework, one can take their purchase home without paying a single Rupee towards it – this can tempt people into buying things they do not need and, in some cases, cannot afford.
Credit Suisse estimates BNPL to power 13% of e-Commerce by FY26, a sharp increase from the current level of 2.5%. A RedSeer report anticipates India’s online BNPL market disbursements to reach USD 45-50 bn by FY26, from the current USD 3-3.5 bn in FY21. BNPL has a lot to offer. However, that offering is still a loan at its core, and one needs to exercise caution while looking to avail it.
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