Rise and Fall of Buy Now Pay Later Fintech
The article ‘Rise and Fall of Buy Now Pay Later Fintech’ by Rahul Shamota elucidates the business gaps filled by BNPL Fintech Companies, the functioning of BNPL, and its manner of making a profit. The author also points out various reasons for the decline of BNPL Fintech Companies.
To find a place in the business market and be successful in the same one must find the gap in the market and present a mechanism that bridges that gap and consumers will follow that bridge to reach the destination that they found difficult to reach earlier. Buy now pay later (BNPL) fintech has also adopted the same method to establish itself in the market. BNPL Fintech integrates the use of technology to make credit facilities accessible to customers.
Some of the key business gaps filled by BNPL Fintech Companies that paved their path to success:
1. Digital Process:
The consumer wants to avail all the services at the palm of his hand in as much less time as he can get and want to become more independent. Looking at the system of the bank for disbursement of the credit requires a form to be filled whether physically or digitally, followed by credit and physical verification of the same, taking 5 to 7 working days. Same on the other hand fintech companies require only basic KYC details, and without any physical verification within minutes credit decision is made and financial instrument in the form of prepaid card or the credit limit is issued to the consumer.
2. Credit History:
Every bank before issuing a financial instrument checks for the credit history from a credit bureau and most of the applications are rejected if they do not have sufficient credit history on the other hand fintech companies are much more lenient on the requirement of credit history and the financial instrument is even issued without any credit history of the customer.
3. No interest or fee:
Any financial instrument issued by a bank whether a loan or credit card has a certain interest or fee attached to it but in the case of BNPL services the consumer is provided with the credit facility without any fee or charges and even an interest-free repayment period generally of 3 months and apart from this the consumers also gets a lucrative discount and cashback offer for making through BNPL cards and services.
Target Consumers of BNPL Fintech Companies
The target consumers for the BNPL Fintech Companies primarily are the consumers that are not eligible as per the bank for available financial instruments generally who have low income, lesser tenure in a job, no credit history, or even the persons who do not have jobs such as students. The credit limit of financial instruments offered by BNPL ranges from Rs 10000 to Rs 2 Lakh.
Features of financial instruments offered by BNPL Fintech companies
- No Joining fees.
- Ability to pay in 3 installments without any interest.
- Lucrative discount and cashback offer.
- No requirement for credit history.
Growth of the BNPL fintech industry in India: Some of the key statistics about the growth of the BNPL market in India are (as per data shared by globaldata.com):
1. BNPL is to reach $15 billion by the year 2026 with a compound annual growth rate of 32.5 percent between 2022 to 2026.
2. BNPL market to reach $4.9 billion in the year 2022.
3. BNPL market is to grow at a rate of 21 percent in 2022 which is 3 percent more than global growth as per a report shared by Experian.
4. 22 percent of consumers bought goods using BNPL services and there is an increase of 71 percent in purchases of items online since the pandemic as per a report shared by researchandmarkets.com.
Functioning of BNPL Fintech
The BNPL fintech companies provide the customer with a prepaid card with a credit limit already fixed as per the eligibility of the consumers and these cards can be used just like a debit card to make online payments and payment at the point of sale and the credit limit that is used to make the payment is deducted from the limit of credit issued to the consumer, the consumer has to repay the amount spent in equated installment in a period of 3 months.
To provide this facility fintech generally partners with a bank and issues cards in co-branding with the bank and generally acts as an intermediary in providing access to credit between the bank and the consumer. To understand this in a better way let us take an example, BNPL Card X is issued by ABC fintech company in co-brands with Bank Y to the customer Z; now in this case, the access to credit facility is provided by ABC fintech to the customer Z but the finance for this credit facility will be provided by the bank Y and the fintech company is only an intermediary or platform provider.
This a common misbelief that BNPL cards are credit cards but that is false. BNPL cards are prepaid cards loaded with a credit limit and this limit decreases with the use of the card to make payment and restores when the amount so spent is paid back. For example, a BNPL card with a credit limit of Rs 25000 is used to make a payment of Rs 5000 then the available limit to make further payments will be Rs 20000 and after successful repayment of Rs 5000 so spent the limit restores to Rs 25000.
How does BNPL Fintech make a profit
With no joining fee and no interest on credit limit used it seems no way that BNPL fintech can survive as this proposes a question of how this fintech makes a profit. The profit of fintech companies does not lie with the consumer but with the retailers. Due to a lack of access to the credit facility, most consumers are unable to purchase products that require instant finance and the consumer do not have sufficient finance at hand here comes the fintech companies in the play they provide the consumer with a credit limit and hence enables him to make purchases beyond his financial limits with an ease that the burden will be converted in EMI and the purchase amount to be repaid in three months.
Let us understand this with an example: Suppose the salary of Person X is Rs 15000 and he wants to purchase product A with a purchase value of Rs 8000 it will not be possible for Mr. X to purchase the product from his salary as it will be difficult for him to manage monthly expenditure from remaining Rs 7000 at hand. With the use of a BNPL card the consumer can purchase the product and distribute the purchase burden into three equated monthly installments making it possible for him to purchase the good and also maintain his financial stability.
Now with the purchasing power of the consumer be increased he can purchase products of higher values suppose earlier the product A has sale of only 100 units per month but because of more consumers be able to purchase the product due to increased purchasing power the sale jumps from 100 units per month to 250 units per month and this additional sale of 150 units in a month is possible due to BNPL card facility so the BNPL card provider will ask for a share in the profit margin of the retailer and this share in the profit margin is the major source of profit for the BNPL service providers and the BNPL service will be available to only those retailers who agrees to share some profit margin with them and the other source of profit for the BNPL service providers is the late fees and penalties charged from the user for the delayed payment and defaults in the payment or if the user is not able to pay in 3 EMI then option to convert purchase in EMI beyond three months is also offered but interest is charged on EMI conversion beyond three months.
The Downfall of BNPL Fintech
On June 20, 2022, RBI issued a notification to fintech firms and non-banking financial institutions banning them to load prepaid instruments such as digital wallets or stored value cards with credit lines and can only be loaded with a debit card, UPI, or bank payments.
It presented the BNPL service provider with a difficulty that they can no longer provide customers with the card with pre-loaded limit as the BNPL service provider is not authorized to load limit in the prepaid cards or digital wallets.
It is like any amount in the Paytm wallet to be loaded by the user of Paytm from his bank account and Paytm cannot give a preloaded wallet to the customer. So for the BNPL service providers, the sole business model on which they are working is to take finance from the bank and load the wallet, and to repay the bank after receiving repayment from the customer is made not permissible by the RBI and since then the majority of the BNPL service providers either have changed their business model or stopped issuing new BNPL card and closed functioning for the existing cards. The request of the BNPL service provider to consider the user account as a bank account as full KYC of the customer is made by them Is also rejected by RBI.
The most adopted change by the BNPL service provider is the opening of a mini-bank account now this bank account is loaded with credit in the form of interest-free loans to the customer and the customer can use finances deposited in the mini-bank account to load the card with the finance and continue to utilize the service of BNPL card creating an extra investment and managerial requirement for the BNPL service provider to provide facility for the mini bank account.
Another reason that justifies the step taken by RBI to ban the loading of prepaid BNPL cards via credit line is Lack of credit awareness: most of the targeted customers of the BNPL cards were the millennials or generation Z persons from the age group 21 to 30 years and most of the person does not have proper credit awareness in the enthusiasm of increased purchasing power the user purchases the products not even required by him and it makes difficult for him to repay the loan amount timely and ignorant of the terms and conditions of high penalties and late fee on defaulted payment the user is trapped in a debt and to get out of this debt the user has to take financial assistance from other sources such as bank and moneylenders and this poor credit behavior impact their credit score on credit bureaus and updates them as the defaulter on credit bureaus and making them ineligible for further financial facilities offered by the bank.
The other issue was also that if the customer faces any problem in the repayment and updation of records to whom he has to approach the bank or the BNPL service provider as most of the BNPL service provider in this regards requires to contact the bank for any problem faced in credit facility and the bank also turn out them by stating it is the service provider to whom the customer should contact and there was an absence of common dispute resolution authority representing both bank and BNPL service provider so that the customer not to run from pillar to post.
The BNPL service providers have grown in the grey area of legislation and expanded exponentially due to a lack of credit facilities and the gap in the credit industry but at last, the mayhem presented by them finally comes to an end, and these fintech companies are put under control before the situation could have become such that the RBI and concerned authorities were not able to do anything to remedy the same.
As RBI is not against providing the customer with credit in an instant manner like the 90-second loan, same-day disbursement of the loan, pre-approved loans, and credit cards but not so lenient that it will allow any business to function at the cost of interest of the common masses and make the public suffers at the profit of business houses.