Why BNPL firms need to balance convenience and responsibility

While the BNPL structure looks too tempting to pass, it comes with a cost that the users should factor in while considering it in their purchasing decisions.

The Buy Now Pay Later (BNPL) model in India has attracted several discussions since its launch. Positioned as a potential disruptor for small credit-based transactions, this model has steadily emerged as a preferred payment mode for millennials globally.

The microfinancing model has an annual growth rate of 22.9 percent, with a large share of the pie coming from consumers in India's tier 2 and tier 3 cities. The market size for the product in the country is expected to reach approximately $14,000 million by 2024.

But is BNPL walking the talk?

In a market that is devoid of any alternative credit options, especially for people, who do not have an employment history or credible credit score – this model perpetuated by leading names like Later, Lazypay, Amazon Pay and Simpl comes off as a convenient and hassle-free method to write off immediate purchases and financial commitments.

The market in India currently is hugely governed by leading fintech and e-commerce players who have built a three-way bridge between merchants, consumers and financial institutions to enable smoother solutions.

While BNPL was launched solely for online shopping, it has expanded to offline stores in the last few years after physical shopping resumed post-COVID. According to the Global Payments Report 2023 by Worldpay from FIS, BNPL’s global e-commerce transaction value is projected to grow at 16 percent  CAGR from 2022 to 2026.

Today, there are many BNPL models available in the market:

Instant financing: A model wherein a third-party service provider offers immediate financing options at the point of sale.

Merchant-specific BNPL: Some retailers or e-commerce platforms have their own BNPL programs. They offer customers the option to finance their purchases directly through the merchant, often with special promotions or incentives tied to their brand.

Credit card BNPL: Some credit card companies offer BNPL features that allow cardholders to convert specific purchases into instalment plans with lower interest rates or zero interest for a promotional period.

Pay later apps: Mobile apps, often offered by fintech companies, provide users with BNPL services. These apps allow customers to purchase using virtual wallets and split the payments into instalments.

Also read | 6 easy steps to become debt-free

The cost factor when opting for BNPL

While the BNPL structure looks too tempting to pass, it comes with a cost that the users should factor in while considering it in their purchasing decisions.

The model comes with an interest rate that is ideally a percentage charged on the amount claimed as BNPL. In India, these rates can be anything between 10-30 percent based on the type of transactions and credit score.

Further, if the users happen to default on payments, they can also incur a penalty or incur a substantial debt since the company will continue to charge them interest. This can lead to significant financial distress and also affect credit scores.

Also read | Should you use credit cards or buy now pay later schemes?

Lack of regulation a challenge

The BNPL segment in India faces several challenges, particularly concerning the changing regulatory landscape and other factors.

Currently, no specific regulatory framework is dedicated solely to BNPL services in India. However, various existing regulations and guidelines related to non-banking financial companies (NBFCs), e-commerce, and consumer protection, apply to BNPL providers.

Especially, guidelines related to the First Loss Default Guarantee (FLDG) and other digital lending guidelines hold the market and all its players responsible at different stages of the payment cycle. These measures ensure the consumer is insulated from exploitation due to lack of education.

Further, the RBI is also working diligently towards making the BNPL sector more accountable by implementing data protection and consumer protection regulations and holding discussions at regular intervals after deep scrutiny and monitoring.

Data privacy and security

BNPL platforms collect significant consumer data for credit assessments and transaction processing. Ensuring data privacy and maintaining robust security measures to safeguard customer information is crucial. Adhering to evolving data protection regulations, such as the Personal Data Protection Bill in India, can pose challenges for BNPL providers.

Credit risk management

Managing credit risk is critical to BNPL operations. Conducting accurate credit assessments and determining creditworthiness is crucial to mitigate the risk of defaults. However, striking the right balance between expanding access to credit and responsible lending practices can take time, mainly when catering to a diverse customer base.

Consumer indebtedness and customer complaints

The convenience and ease of BNPL can tempt consumers to overspend or accumulate debt beyond their repayment capabilities. This can lead to financial stress and defaults, affecting consumers and BNPL providers. Balancing the need for responsible lending practices while offering accessible credit options is a challenge that requires effective risk management and customer education. Further, ensuring effective complaint resolution mechanisms and providing transparent and accurate information to customers is also a crucial challenge for BNPL providers.

Building trust and reputation

Establishing trust and a positive reputation in the market is vital for the success of BNPL providers. Building collaborations with merchants, addressing transparency, fair practices, and consumer protection concerns is essential. BNPL companies need to invest in building strong customer relationships and effective communication strategies to overcome any negative perceptions associated with this relatively new payment model.

What lies ahead for BNPL firms?

BNPL firms in India are actively addressing the challenges posed by the changing regulatory landscape and working towards evolving their operations to ensure compliance and sustainable growth.

Major players invest in robust compliance infrastructure and processes to adhere to existing regulations and guidelines. They are actively monitoring regulatory developments, engaging with industry associations and participating in discussions with regulators to contribute to formulating appropriate rules.

Secondly, since BNPL players in India are also aware of their responsibilities towards the ecosystem, they are taking action to enhance their credit assessment processes, leverage advanced data analytics and refine their underwriting models to assess borrowers' creditworthiness accurately.

In future, to survive the wave of evolution and innovation, BNPL firms should continue to invest in risk management capabilities, including ongoing monitoring of customer repayment behaviour, to mitigate the risk of defaults. They should also focus on building strong and mutually beneficial partnerships with merchants, aiming for seamless integration, customer experience and alignment with merchant goals.