Buy Now, Pay Later: Die Another Day

• "We live in a world of instant gratification, the world of the quick fix." - Rachael Taylor

"Never put off till tomorrow the fun you can have today", quotes my friend Natasha as she swipes to complete her online purchase of hair extensions...

Yes, hair extensions because why should one wait for hair to grow over time when you can just get it at the click of a button today!

We live in the age of instant gratification - where we expect everything instantly, be it groceries, the latest iPhone or even your life partner.

Advances in technology mean that everything good, bad and ugly can be achieved at the touch of a button.

And the market is always ready to give customers what they want, not necessarily what they need...

Credit cards are so yesterday... Fintech companies are nothing if not business savvy. They go where there's money to be made.

And the money it seems is in the Buy Now Pay Later (BNPL) trend.

Imagine having a big brother who is always there for you...

Your phone bill is overdue but you have no money? Fear not, big brother will pay it instantly.

Last pair of the latest Nike sneakers available but your pay cheque is not expected till the end of the month? Relax, big brother has got your back... or in this case your feet.

Feel like spending the weekend in Goa but running low on cash... go ahead, big brother has got you covered.

You want a big brother too? Well now almost anyone can have one... Big Brother goes by the name, "Buy Now, Pay Later".

Firms across the globe have all jumped on the BNPL bandwagon to instantly cater to our bull-headed impulses, thus fuelling our greed for more.

Many BNPL companies such as Affirm (AFRM), Afterpay, and Klarna lead this new field.

Companies such as PayPal, Amazon, Walmart, and Mastercard are all offering BNPL options at checkout or are partnering with BNPL companies to offer this service to their customers.

In 2021, Amazon partnered with Affirm allowing its customers to break up purchases of US $50 or more into smaller instalments.

Even Apple has jumped on the bandwagon and is set to launch its own BNPL scheme with Goldman Sachs.

The BNPL industry is now worth over US $100 bn globally and is set to grow. With more people taking advantage of this option, it is expected to continue growing exponentially.

What exactly is "Buy Now, Pay Later" (BNPL)?

If you think about it, BNPL has always been around in India - the tea seller who supplies you with multiple cups of tea everyday but settles your bill at the end of the month.

Or the local Kirana store which sends items to your house as and when needed and settles the bill on a fixed date in the future.

Fintech companies have just borrowed this age-old idea and created a product that is all encompassing.

Buy Now Pay Later is a service which allows you to buy a product or avail a service without having to worry about paying for it immediately.

It is excellent for those who need products and services now but don't have the money available.It's simply a short-term loan product where a BNPL lender pays the merchant or service provider at the point-of-sale and allows you to repay the loan at a future date with little or no interest charges.

In the last few years, BNPL has become a global craze, especially since the start of the pandemic.

Payments via instalments have exploded in popularity along with a general surge in online shopping.

Unlike traditional loans, BNPL are small ticket loans of as low as Rs 500 for daily needs.

And where it scores over say conventional credit cards is that there is no hassle of an application process or credit scores and it is approved within minutes.

The new emerging credit product offered by fintechs is seeing increasing demand from Gen Z and millennial users.

In many ways, BNPL products are also turning out to be the first exposure to credit for customers in the age group of 18-30.

The Rise & Rise of Buy Now Pay Later in India

While BNPL might be fashionable currently, the EMI financing business - consumer loans repayable in equated monthly instalments - was pioneered by Bajaj Finance in India over a decade ago.

It has grown considerably in India over the last 10 years, mainly built on the subvention method offering its customers interest-free loans.

Over the past decade, Bajaj Finance (BAF) has grown its loan book at a CAGR of 35% and PAT at a CAGR of 33% with an average RoE of 20%. During this period credit growth in the Indian banking sector has been only 10% p.a.

BNPL has taken India by storm with the current BNPL market worth over Rs 25,000 cr.

According to consultancy firm RedSeer, it could potentially grow to Rs 375,000 cr by 2026.

The firm also estimates that the number of BNPL users in the country may touch 80-100 m by 2026 from the 10-15 m estimated currently.

At this rate, BNPL is all set to overshadow the traditional credit markets which are largely focused on home loans, personal loans, and salary overdrafts.

Penetration of smart phones, growing number of internet users, availability of data due to multiple credit bureaus and easy access to capital have led to the advent of multiple fintech players in the past few years.

The pandemic caused a fundamental shift in how customers engage with businesses.With the implementation of lockdowns, digital adoption skyrocketed.

People began purchasing practically everything online, from food and groceries to laptops and wash basins. This resulted in an increase in online payments as well as a surge in demand for BNPL.

For a country with a population of over 1.3 bn, only 60 m Indians are unique credit card-holders, which means 93% of India has no access to credit.

In comparison, over 250 m Indian consumers spend digitally on apps and e-commerce websites. This is expected to double in the next few years.

And this potential has birthed a host of BNPL platforms with every major player having their own unique offering.

Some of the BNPL players in India include Zestmoney, Lazypay, Paytm Postpaid, Amazon Pay Later, Flipkart Pay Later, Capital Float, and MobiKwik among others.

Traditional banks' primary credit offerings, i.e. credit cards, have been facing a steady decline in customer satisfaction and use since the pandemic due to a range of factors such as high-interest rates and shrinking credits.

Hence, banks have also forayed into the BNPL segment as a necessary measure to retain their customer base and gain a competitive edge.

ICICI Bank offers Pay Later services on its app while HDFC Bank has its FlexiPay service. You can pay in parts with Kotak's Smart EMI card or use Axis Bank's Freecharge Pay Later.

What's Wrong with Buy Now Pay Later?

BNPL is a rage across the world. It seems like a win-win for all parties involved.

Retailers love it as a way to increase their sales.

FinTech companies and banks see it as a way to build new, appealing lending propositions.

Consumers get the benefit of buying what they desire even if they are currently unable to afford it.

But is it really as good as it seems?

Let's take a closer look...

Consumer Troubles

BNPL could create a Debt culture in the long term

As per an RBI report, in 2018 household debt as a percentage of the GDP stood at 30%However, by 2021, this figure has risen sharply to over 37%.

The ratio is still lower than most other countries - 90% in Britain, 79% in the US, and 65.3% in Japan.

Hence, there is a huge opportunity in India for fintech players to coerce consumers to take on debt.

And let us not forget that although BNPL might seem like the hottest trend at the moment, it is in reality, the only available option to first-time borrowers avoided by banks as they have no credit history.

Statistics reveal that over half the borrowers on BNPL platforms are new to credit. A majority of these borrowers are in the age group of 18-30 years of age and there is a huge gap between their desires and affordability.

The rapid growth of BNPL platforms has created another problem. New borrowers can take multiple loans on various platforms simultaneously without disclosing how many loans they have taken.

Even though lenders might assume they are giving small amounts of loan to a first-time customer, a consumer can easily apply on different platforms and rack up a debt of over Rs 100,000 with minimal effort.

This puts the lender at risk as the customer may not have future cash flows or the ability to repay such an amount of money.

Further, seeing the demographic that is generally availing of these services, a lot of them may not understand the implications of taking these short-term loans.

Retailers advertise it as service of convenience, but ultimately it is a loan which must be paid at a later date, failing which there is a liability of interest and other consequences.

Buy Now, Pain Later: When BNPL comes back to haunt You

When it comes to buy now-pay later, consumers seem to have a love-hate relationship with the offering.

Research shows that more than half of customers regret buying something on buy now-pay later terms.

In many instances, people feel that BNPL has led them to buy things they can't afford and encouraged overbuying.

As with any service relating to money, nothing comes for free.

A lot of consumers assume that BNPL does not affect their credit scores. That may be true as long as you repay the amount on time.

However, failure to make payments on time can hurt your credit score. BNPL is after all a personal loan and will have to be repaid back.

Borrowers need to ensure that timely repayments are done to maintain a healthy credit score. Depending on the type of plan individuals opt for, they may be charged some fees and interest if they fail to make the payments on time.

Loan? But I didn't sign up for it!

While BNPL may be a boon for shopaholics, it can be a pain for others. It has been reported that consumers are being signed up for BNPL despite not seeking it.

A lot of companies thrust credit lines onto unsuspecting customers when they install an app.

And this is not unique to apps. Be it a ride sharing company or an ecommerce giant, they are all encouraging consumers to use services on the go and pay later.

All it takes is one costly click at the checkout page and unknowingly a customer has taken on an unneeded loan.

A worrying number of people have reported using BNPL without meaning to.

Some BNPL users have ended up accidentally using the service because it was selected as the default payment option at checkout.There have been multiple complaints over the last few months about customers finding out that they owe random banks tens of thousands in loans.

When going through your credit report, don't be surprised if you see loans or enquiries from lenders whom you have never approached.

For instance, opting for Ola post-paid may result in you unwarily owing an amount to IDFC bank.

In most cases, the credit is free for a specific period. But if you delay or miss a payment or don't pay, it will be reflected in your credit report, and it will impact your score.

The problem is that everything is not clearly explained to people during the onboarding process. BNPL is pitched as a convenient payment option. There is no mention of the word "Loan" on any of these websites.

FinTech Companies: Does BNPL = 'Bad Non-Performing Loans'?

Be brave. Take risks. Nothing can substitute experience... of losses.Quick to borrow is always slow to pay... BNPL companies around the world are learning this the hard way.

Companies are struggling with the problem of late or missed repayments with some players seeing bounce rates, i.e. loans not paid back on time, of 10 to 12%.

In traditional loan products, the risk is priced in and the margins are large enough to absorb such non-performing loans.

However, BNPL services are offered for free or at very low interest rates.

Thus, any additional costs such as recovery costs and a pile of bad loans could become a burden for BNPL companies.

Experts have predicted potential "carnage" for the buy now, pay later sector as providers burn through cash, bad debts balloon and customers retreat from using the service.

Oppenheimer's Chris Kotowski called BNPL, "Sub-prime in a new dress."

A lot of the leading companies worldwide have extremely high delinquency rates. Overall, the sector lost billions of dollars in 2021.

BNPL giant Klarna reported operating losses of US$ 748 m for the full year 2021.Afterpay reported a US$ 156.3 m loss, up by almost 700% compared to the previous year's loss.

Rival BNPL service Zip also reported a US$ 652 m loss, a whopping 3,000% increase over the previous year.

And this year could be worse as balance sheets and cash flows weaken. This would be exacerbated by the expected interest rate hikes.

Retailers: The customer's perception is your reality...

For retailers, the lure of BNPL is simple: customers spend more.

And if everyone is using it, you would have to be very brave as a retailer to not offer it. But therein lies the problem...

Retailers are exacerbating their own margin erosion in order to compete.

A classic BNPL business involves the merchant or brands bearing the interest costs for customers.

Large brands typically offer commissions of 5%-10% to BNPL players. On the other hand, margins are very small for small retailers usually at just 2% to 3% depending on the product.

With such tiny margins, small retailers are finding it increasingly difficult to give extra commissions to these platforms.

As the industry matures, these companies are likely to start charging either higher merchant fees or higher interest rates. That means BNPL may not be a feasible option in the long-term for some merchants.

Another risk to merchants and retailers is that in case of a customer defaulting on a payment, it could lead to backlash against the merchants.

A consumer could blame the retailer for getting them into taking a loan they can't pay back, not the app on the checkout point that allowed them to make the purchase.

If public opinion turns against these BNPL options, brands that facilitated these payments may become targets.

To Wrap up...

BNPL is a good option for those who need something but don't have the money immediately available to them. If used correctly, it can be an extremely effective and convenient way to pay for things.

However, it is extremely important for BNPL players to clearly explain exactly what consumers are getting into before offering them such services.

While the BNPL opportunity is huge, multiple factors influence the market in India.

Well-capitalised consumer-focused banks can give new entrants a run for their money.Given the relatively small size of India's ecommerce market, it seems likely that established players like Bajaj Finance will continue to rule the roost.

On the flip side, BNPL has caught the attention of regulators across the globe, who are becoming increasingly concerned about how easy it is for consumers to buy more than they can afford using BNPL and potentially rack up sizeable debts.

For, with every pleasure must come pain - that is the way of things. And so, immediate pleasure can only mean deferred pain.

As this market is unregulated, critics say some people are able to take out credit that they otherwise would not be able to obtain.

In India too, the Reserve Bank of India is keeping a close tab on the digital lenders. Last November, a working group constituted by the RBI found that 600 out of 1,100 lending apps on Indian app stores were illegal.

The working group also recommended treating buy now pay later (BNPL) arrangements as balance sheet lending.

This in turn may mandate knowing your customer (KYC) and credit score checks before extending BNPL options to borrowers.

BNPL can be a great service if used in the correct manner and for the right reasons.

For instance, new age payment firms offering the BNPL option to small Kirana stores across the country has been a phenomenal success.

Rather than enabling excessive consumption, 14-day loans provide these small retailers the much-needed liquidity to stock more inventory.

Not surprisingly, companies providing these services to such retailers instead of consumers have seen very low delinquency rates.

Clearly, this credit innovation can be more sustainable when it finances livelihoods, and not just lifestyles.

However, for consumers, BNPLs are no worse than any other product that helps them spend money they don't have.

And like any other loan, it is eventually due...

I am a great believer in old adages. And here is one for this article - Good things come to those who wait.