RESEARCH ON BNPL SCHEMES AND THEIR BENEFIT TO FINTECHS

BNPL schemes are a category of delayed payment options. It is a viable option for consumers
who are ineligible for credit cards. Due to low credit card penetration in India, supplemented
by traditionally strict eligibility criteria to avail formal finance, there exists a sizable under-
served population with little or no credit histories. This situation perpetuates a cycle wherein
people seeking formal credit are turned down due to unavailable or inadequate credit scores.
Advantage over credit cards
The rise of BNPL products may alter consumers’ use of payment methods such as credit cards,
which share some key characteristics with BNPL. Both BNPL and credit cards offer short-
term, interest-free loans, enabling consumers to take immediate possession of goods and delay
payments. For some consumers and merchants, BNPL products may be more appealing than
credit cards. Unlike credit cards, BNPL products can be approved without a full credit check
and offer consumers flexible financing options, transparent terms, predetermined repayment
schedules, and lower or no interest fees.
The biggest advantage of BNPL schemes over traditional commercial bank is that they are
targeting a key area of commercial banking operations. BNPL products have the potential to
replace credit card payments, cutting into profits for providers of credit card services. Issuing
credit cards is highly profitable for banks—especially large banks—compared with other bank
activities.
Popularity with the younger demographic
BNPL is a fast and convenient option for all these consumers. The registration process is simple
and can be initiated and completed during checkout on e-commerce sites. Customers receive
real-time approval and don’t have to deal with cumbersome paperwork. Additionally, the youth
populace favours the BNPL scheme because of the fact that it offers a formal micro-lending
product in an informal, user-friendly manner.
Steps being taken by banks
Domestically, while fintech players were the first movers in the BNPL space, banks are
now offering stiff competition. in some cases, banks and payment providers have also tied up
and are offering pay-later options. Ezetap, for instance, has partnered with Axis Bank to
provide BNPL facilities and deploy these POS machines across retail outlets. Thus, banks are
also joining in the BNPL bandwagon, but given the fact that first-movers are creating a niche
for themselves in the segment, there is some catching-up for banks to do.
BNPL growth and other differences with banking facilities
Other difference between BNPL and credit cards (which are issued by banks) are discussed
here. There are other strong narratives in favour of growth of BNPL players owing to increase
in digital payments. The growth trajectory blueprint of BNPL segment is discussed here.
THE IMPACT ON BNPL INDUSTRY OF FUTURE REGULATORY CHECKS: The
way forward
Experts suggest that there is no problem with the BNPL product per se but there are several
risks that come from hidden costs, lack of disclosures and transparency, and a new-to-credit
population with no credit history. The lack of financial literacy in general, and in smaller towns
in particular, is harmful to borrowers but advantageous for lenders. Besides, there are several
regulatory loopholes such as the lack of data protection laws, as well as lender-side issues such
as inadequate collection frameworks.
Suggestions of RBI Working Committee on treating BNPL as Balance Sheet lending
The report of the RBI Working Committee on Digital Lending (may be accessed here)
highlights under point 3.4.1.2 that activities performed by digital lending players such as
offering BNPL facilities, should be treated as part of balance sheet lending, if not in the nature
of operational credit by merchants. It also calls for the central government to frame appropriate
notifications in this regard. The Committee recommends that BNPL facilities be treated as a
part of lending.
Future Regulation: Digital Lenders existing in the sector may now possibly have a clear idea
of what to expect in terms of regulatory compliances. Regulated entities have nothing to worry
about. However, unregulated entities are the ones which might suffer as a consequence of the
RBI Working Committee Report mentioned above. Most of the entities which have an NBFC
license working in the BNPL sector are likely to only benefit from regulation by eliminating
illegal lenders in the space. However, players without an NBFC license are likely to suffer. It
is believed that as accessibility of technology grows in India, the sector is expected to expand
and thus, it would be an appropriate time to bring regulations (more on this can be accessed
here).
Data Privacy: RBI has historically been vigilant about ensuring protection of data of
consumers. The impact of potential regulations will likely affect customers and their data. It
would impact the credit analysis of the customers that fintech has been doing by collecting the
information from customers. BNPL and Digital lending is done only based on Alternate data
points which examines the risk assessment of the customers (more on this can be accessed
here).
Technology Regulation: The Working Committee Report stressed significantly on the
formation of an agency to supervise digital lending apps. This is covered under point 3.4.2.
Basic digital guidelines will be issues by DIGITA for which every Digital Lending App has to
comply with. Many more such suggestions are added by the working group. This would have
a positive effect on Industry as it will help Digital lenders to get verified by following the
compliance and promote them as verified business as well.
Creditworthiness of new customers from smaller towns: The new borrowers are availing
BNPL offers on platforms without disclosing how many short-term loans they have
accumulated. As a result, many new-to-credit borrowers have multiple credit lines that
ultimately result in over-leveraging. Unsurprisingly, the delinquency rate in new-to-credit
customers is higher than the average in an unsecured portfolio.
However, BNPL players defend themselves by arguing that they are testing and experimenting
with first-time borrowers by giving them small loan limits. As they use and repay the older
loans, the platforms gradually make these borrowers eligible for bigger loans, while weeding
out the truants. And all the while, their models are learning from the accumulated data. The
aspects regarding the creditworthiness of customers is dealt with in detail along with some
crucial statistics under this piece.
Qualitative Impact on Youth; Debt traps: Given that BNPL schemes provide for quicker
lending for customers who are not exposed to credit card lending by banks, it runs the risk of
pushing uninformed lenders down vicious debt traps which they might fail to climb out of.
BNPL works as an alternative to credit cards, wherein if the customers fail to clear their bills,
charges are levied for delayed payments. These charges might appear small, but may blow up
over time. This ends up creating a debt trap which is likely to impact credit history as well as
credit future. More on the aspect of debt traps can be accessed in this piece.