Building resilience, profitability around BNPL product is tough: QED Investors’ Asia Head

Buy now, pay later (BNPL) is a consumer behaviour-focused product, and building resilience and long-term profitability though it can be done with the right innovations, it will be challenging, said Sandeep Patil, Partner, head of Asia, QED Investors, a global fintech-focused venture capital firm. This comes at a time when the Reserve Bank of India (RBI) has tightened regulations around BNPL offerings by fintechs and non-banking financial companies (NBFCs).

QED Investors’ portfolio in India includes OneCard (FPL Technologies), Jupiter, Upswing, Refyne and Financepeer.

QED Investors has been closely tracking the BNPL space globally, especially with its investment into Swedish fintech unicorn Klarna which is known for its BNPL product in European markets. Matt Risley, currently a partner at QED, had also served as a CFO at Klarna, helping them build their credit practice.

Speaking to Moneycontrol, Patil said, “BNPL in Northern Europe worked under a very particular set of circumstances. In Northern Europe, having debt on your own balance sheet as an individual is considered a burden, people don’t like to have debt. Klarna succeeded as a convenience product, all they had to do was send a text message as a reminder and people would repay it as quickly as they could.”

“But BNPL players in emerging markets started with a few different hypotheses—it started with convenience for the top 20-40 million end users. They could also make a case of it being a faster product because they could circumvent two-factor authentication when using a pay-later product with Swiggy, Zomato or Flipkart. That’s why it became tremendously successful. But here it’s a payment product and not a credit product, it’s the convenience you are paying for, and just delaying payment by 15 days or 30 days,” he added.

Again, when Klarna tried to expand into Southern Europe and even the US, they weren’t as successful as they were in Northern Europe because of the fundamental difference in consumer behaviour.

Patil clarified that though QED is invested in Jupiter, the fintech’s BNPL programme is held out as an extension where it is not invested in. QED Investors is not invested in any BNPL product in India.

Stuck with mediocre customers

He highlighted that the other use case of BNPL in emerging markets would be for assessing customer credit for new and also existing customers of banks who haven’t been availing credit products. After issuing a BNPL product and observing customer behaviour around it, fintechs and banks can accordingly start offering credit lines starting with smaller limits like Rs 1,000 and eventually increasing it.

However, such experiments too could lead to newer challenges.

“Your learnings are not compounding. The population that is getting into this product, a good chunk of them could be migratory, changing their cities and phone numbers, and it’s not easy to keep a track. There’s this churn that you have not accounted for,” Patil said.

He added, “Then there is a selection factor to be taken into account. Say out of the 100 customers you have, you had to cut off 10 of them for not being the right fit, and another 20-30 of the customer pool which improved in their credit behaviour will eventually have access to many other traditional products like credit cards, lending, etc. Most importantly, all the big lenders will now be able to see them in bureau files, they will be able to offer them loans now.”

Ultimately, the fintechs offering BNPL products will be left with a mediocre pool of customers who would also likely contribute to high churn.

Patil said, “So building resilience and long-term profitability around this product is a tough challenge. That doesn’t mean it can’t be done. But it’s a very difficult problem to solve. There are various strategies founders are trying like providing privileged access, underwriting loans and using machine learning, etc. I believe there are multiple sets of innovations yet to be done on this product for it to become an integral part of the credit story.”