OPINION: The demand for BNPL is being fuelled by low penetration of credit cards in India

Ever since the pandemic broke out, digital offerings have gained greater growth momentum. Among these, one popular category has been BNPL (buy now, pay later) credit products. This is an interesting phenomenon as credit card usage has never quite caught on in India as one would have expected it to, especially in non-tier 1 cities. As per GlobalData, the country has only five credit cards for every 100 persons.

Nonetheless, the BNPL credit option has been finding increasing favour among various cohorts across India. RedSeer Consulting estimates the segment will touch almost $50 billion by 2026. Given its tremendous potential, multiple players from diverse domains have entered the space, including fintech/payment players, e-commerce entities, a ride-hailing aggregator and banks.

BNPL Benefits and Changing Consumer Habits

Thanks to the instant digital credit offering, millennials and other younger cohorts have been using BNPL while shopping online, which includes first-time digital payment users. Towards catering to the rising demand, many e-commerce and smaller D2C (direct-to-consumer) brands, which wouldn’t otherwise be in a position to offer credit facilities to consumers due to the costs involved, are also using BNPL.

The popularity of BNPL can be best gauged from the response of banks that were initially apprehensive about entering the sphere but are now active participants.

BNPL provides a maximum credit of a couple of thousands up to one lakh only. Conversely, credit card limits can extend up to five lakh or more, depending on the service provider and the creditworthiness of an individual.

Yet, given the typically higher interest rates of credit cards, many consumers avoid using their cards regularly for small ticket purchases. It is these cohorts in metros and non-metro regions that BNPL players are servicing. The best part is that borrowers can avail of short-term credit via BNPL even if they don’t have a credit history, which is next to impossible with credit cards where hard inquiries are made via credit bureaus before a card is approved, with possible impact on credit scores. As a result, the shopping habits of consumers who were previously reluctant to credit are now changing.

The demand for BNPL is being fuelled by the low penetration of credit cards in the country and the surge in e-commerce transactions during the past few years, particularly after the outbreak of COVID-19. Market analysts believe there is tremendous scope for credit products such as BNPL as the 15 to 45 days’ credit period allows people to manage their monthly purchases and monthly budgets better.

Depending on the BNPL offered, the credit period could extend up to a few months. During this time, the credit amount can be repaid in installments. However, there are late fee penalties and interest charges if the payment is not made within the predetermined date. Accordingly, service providers earn revenue through the commissions paid by merchants as well as via late fee charges, though the latter is not a core revenue-driver as such.

Tailwinds and other advantages

With people being confined within their homes for prolonged periods since March 2020 due to intermittent lockdown restrictions, the simple, convenient and instant credit option has come as a boon, particularly for new-to-credit borrowers, shopping online. Acknowledging the demand, e-commerce portals and apps are providing the BNPL option to buyers.

Earlier, when people required an almost interest-free credit for buying or other recurring expenses, they were inclined to borrow from family, friends or relatives. But the pandemic closed this route, since liquidity constraints affected almost all families. In such a scenario, BNPL gained faster acceptance among shoppers during this period. Whereas the credit offering, first, found favour with young professionals and millennials, people from all age groups also gradually began using BNPL schemes in the lockdown phase.

To leverage the changing consumer habits, some BNPL players have joined hands with kirana stores to provide their customers with a convenient credit option. This is possible since BNPL offers can be approved online within minutes with the help of intelligent tech resulting in minimal paperwork, unlike other credit products which consist of tedious documentation and elaborate credit approval processes. What’s more, BNPL’s real-time credit option has lower chances of rejection compared to personal loans or cards.

It should be noted that BNPL offers ‘without interest’ and ‘with-interest’ options. In offerings with an interest component, in some cases, customers can avail of higher credit ranging between INR25,000 and INR100,000, which is useful for high-value purchases. Here, the interest-based EMIs (equated monthly instalments) could typically be spread over one to three months and in some cases even beyond.

In India, BNPL is used for both daily shopping needs such as personal care products, health and food items as well as high-value goods, including electronics, appliances, cellphones, consumer durables and beyond. Besides facilitating small-ticket purchases without additional charges, the service offers a swift and safe checkout process, making it most convenient for both merchants and online shoppers.

Finally, considering the transparency regarding interest rates, late payment fees, etc. consumers are assured there are no hidden charges in BNPL. Going by these benefits, there is no doubt whatsoever that BNPL is bound to gain greater traction with every passing year.

The author is the founder and chief executive officer (CEO) of payments platform Simpl.

Disclaimer: The opinions expressed are of the author and do not necessarily reflect the views of the Business Insider India.