Over the past two years, consumers in India, particularly millennials in the middle of a havoc-wreaking pandemic, have been increasingly opting for “buy now, pay later” (BNPL) services to shell out for online purchases, whether they are for food or travel tickets.
While the pandemic-induced digital acceleration has spurred the growth of many technology sectors in the South Asian nation, such as e-grocery and mobile payments—both were already growing in leaps and bounds before the COVID-19 pandemic—BNPL is probably the fastest-growing.
A report by market researcher RedSeer predicts the BNPL industry in the country will increase more than tenfold over the next five years, growing to become a USD 50 billion market by 2026 from USD 3.5 billion currently. Users of BNPL services were estimated to rise to 100 million, compared to today’s 10–15 million.
BNPL isn’t an entirely new concept. One of its earliest incarnations was the country’s traditional paper-based Udhar Khata (meaning credit ledger) system where corner shops, known as the kiranas locally, kept manually logged ledgers to let their loyal customers buy provisions on credit and pay them back later.
Then came the advent of e-commerce and fintech in the past decade as part of the country’s digital boom. As e-commerce marketplaces continue to expand and fintech companies begin to take advantage of the digitization to transform the traditional lending model, the first BNPL services appeared on the country’s burgeoning e-commerce platforms. These services provide cash or credit constrained consumers with extra budget flexibility that the conventional banking channels could not offer due in part to their strict credit requirements.
Nitin Gupta is the CEO and founder of Uni. His company found out in a survey that the credit and liquidity issue was pervasive. One of the reasons is that India’s penetration rate in credit cards stands at a meager 3%, which is among the lowest globally.
“We did a survey among the employees in the office where I previously worked and discovered that 30%–40% of employees had either borrowed or given money to relatives and family members. And as we dug deeper, we observed that the issue of short-term credit and liquidity was prominent,” Gupta told KrASIA in an interview.
Uni is known for its signature Pay 1/3rd card that allows its users to pay bills in three-month installments without extra charges. Consumers could also choose to repay in full and receive a 1% cashback reward. The card was launched in June and has already disbursed INR 120 crores (about 16 million USD) as of November. The company has just raised USD 70 million in Series A financing to tap into the under-penetrated credit market in India.
BNPL services usually partner with non-banking finance companies (NBFCs) to disburse loans and earn revenues from late fees, processing fees, as well as subscription charges.
The “buy now, pay later” model began on e-commerce marketplaces, and has expanded to numerous online services in recent years. Startups from sectors like travel, edtech, food delivery, and e-tailing are working with companies including Simpl, Lazypay, ZestMoney to implement BNPL solutions into their services.
“BNPL came in handy to me while ordering food online, so I think I would also book a holiday on MakeMyTrip with it,” B. Surya Pathrudu, a 32-year-old quality control specialist from Visakhapatnam, the largest city of the Indian state of Andhra Pradesh, told KrASIA.
Pathrudu tried BNPL for the first time this September to order online food deliveries. He has since made it his default payment method over other options, including credit cards and mobile wallets, on several services he frequents. “Instant credit at the time of the shopping and zero-interest works for me,” he said.
In a surprising twist, Indian banks, which initially rejected the idea of interest-free BNPL services, entered the fray as their fintech counterparts started to mount competition. HDFC, one of India’s largest private lending banks, launched its Flexipay with a repayment cycle ranging from 15 to 90 days. Similarly, ICICI and Axis, two other major local banks, launched their pay later products.
In addition to satisfying consumers’ gratification, these services are used to power India’s Micro Small and Medium Enterprises (MSMEs) as well.
India’s MSMEs account for almost 30%, or nearly a third, of its GDP. Yet, they’re often plagued by long sales cycles and resulting credit deficits. Meanwhile, bank loans are not always easy to come by. For a variety of reasons, traditional banks view MSMEs as high-risk borrowers—especially so during a weak economy—including their lack of capital and assets, their vulnerability to economic fluctuations, etc. World Bank estimates that the credit gap for MSMEs in India is USD 380 billion.
Bengaluru-based Solv, a B2B marketplace for MSMEs, has launched a credit solution for small buyers and sellers on its platform. Amit Bansal, the company’s CEO, said that MSME-focused BNPL products are “tapping a huge untapped segment” and are helping “build alternate lending models” for small enterprises facing cash crunches.
Venture capital is being attracted to the area as it advances. Tracxn, a venture market researcher, notes that the sector received USD 17.7 million in funding in July alone, compared with the USD 11.6 million in total funding for 2020.
At the same time, as capital inflow keeps flooding into the sector, driving players to compete for customers, expand services, and disburse loans, potential credit risks—if the sector is unregulated or poorly regulated—are also growing.
BNPL services are usually perceived as a payment method rather than a consumer loan. Consumers may not feel obligated to repay on time and can land in the loop of unaffordable debt.
For instance, defaults are already a matter of concern in the United States. As per a study by Credit Karma, a US-based personal finance company, around 40% of Americans who used to “buy now, pay later” have missed multiple payments. Back in India, the Reserve Bank of India (RBI), the country’s central bank, is working towards proposing rules to regulate digital lending products, including treating BNPL lending as part of balance sheet lending, meaning these players will bear the risk if the loans default. The proposal aims to curb irresponsible and illegal digital lending that could expose the country to greater financial risk if massive defaults occur.
“Although BNPL is making products more accessible and affordable, it is essential for these firms to learn about the end-user and their financial habits before they start giving them credit. It may benefit salaried individuals, but offering credit to the young audience who may not have a steady source of income can have an underlying implication. It could hit their credit scores right away, and we do not want users to get into debt at a very early age,” said Ashit Joshi, founder of Nucash, a student-focused fintech service.