BENAGLURU: From buying groceries, gifts, travel to even health check-ups - buy now, pay later (BNPL) has been a runaway success for many fintech companies.
Looking at this exponential growth, the Reserve Bank of India (RBI) in its Payments Vision 2025 document has said that it is exploring guidelines on payments involving BNPL services.
Apart from the existing payment modes like cards, UPI and net banking, this new channel, facilitated by a few payment aggregators, leverages the existing nodal account to route payments between BNPL customers and merchants.
The central bank said, “This novel method shall be examined, and issuance of appropriate guidelines on payments involving BNPL shall be explored.”
Apart from this, the RBI disallows non-bank prepaid payment instruments (PPI) issuers from loading credit lines. Also, recently the RBI proposed allowing linking of credit cards with UPI. Will these initiatives have any impact on BNPL players?
“RBI’s decision of linking credit cards to UPI will lead to massive growth in digital payments. The BNPL arrangement is widely popular amongst those who do not have a credit history or access to credit cards therefore linking of credit cards to UPI may not affect BNPL ecosystem,” says Saurabh Puri, Chief Business Officer - Credit Cards and Lending Products, Zaggle.
Experts say BNPL products are targeted to those users who do not have credit cards, and that there might be some overlap. A report released by financial technology company FIS says BNPL is India’s fastest-growing online payment method. BNPL is projected to rise to 8.6% of e-commerce market value by 2025, up from just 3% in 2021.
Arrangements between fintechs for their digital wallets with PPI issuers and NBFCs have enabled new BNPL line originations to balloon and overtake credit card issuances over the past six months, says Akshay Hegde, co-founder of ShakeDeal, a B2B ecommerce platform.
With so many BNPL lines or credit card-like products out there, the fine line between banks and NBFCs gets blurred.?
Hegde adds that BNPL is a beautiful product for consumers to avail short-term credit and prepare for the eventuality of owning credit cards, but with these measures by RBI, BNPL users will be hit hard, especially those of open loop BNPL fintechs.
The new rules by RBI are said to impact the business models of fintech firms such as Slice, Uni and LazyPay, among others. Saurabh Puri says there are around 25-30 million customers of BPNL which will increase to around 90-100 million by 2026.
The BNPL industry encompasses those fintechs that combine a loan and prepaid card, those that combine loans with digital apps/wallets, and those that disburse loans online and/or at point of sale for consumer purchases.
According to Hegde, the overall market for BNPL in India right now is around $4 billion, but it is expected to rapidly grow to about $40-50 billion by 2026. Explaining credit lines on BNPL platforms, ShakeDeal co-founder says the average credit line is about Rs 10,000. Some BNPL apps provide an interest-free credit period and options to split their payments into 3/6/12 months’ installments.
BNPL players usually charge customers an interest ranging between 10% and 30% depending on the customer, and also make money from merchants in the range of 2-8% where they are advancing the amounts for the said purchase. If people end up missing their payments, the BNPL charges can go up to 48%, adds Hegde.
The BNPL ecosystem is quite popular in the US, and according to a new survey, spending on BNPL has reached 230% since 2020.
The LendingTree survey says many people who use BNPL loans have overspent with them and also make late payments.
Though in India, the ecosystem is growing, Saurabh Puri of Zaggle says with the popularity of BNPL, the payment defaults have also risen.
“With this RBI move there will be more transparency in the system. The basic role of fintechs is to provide the banks with a technology platform which enables them to deploy BNPL solutions,” he says.
However, some fintechs are covering the risk of default for the transactions through the first loss default guarantee arrangement (FLDG).
In such cases, banks do not have to report NPA when there is a default. The RBI has apprehensions with this kind of arrangement, he adds.
Though RBI has come out with stern rules, it is expected that these rules will give more clarity to fintech players and the BNPL ecosystem in the long run.
Quick facts about BNPL
According to the Q4 2021 BNPL Survey, BNPL payment in India is expected to grow by 89.5% on an annual basis to reach $6.9 billion in 2022.
There are around 25-30 million customers of BPNL which will increase to around 90-100 million by 2026.
RBI’s recent rule disallows non-bank prepaid payment instruments (PPI) issuers from loading credit lines.
One of the differences between BNPL and credit cards is that the latter doesn’t require more documentation.
The central bank will soon issue appropriate guidelines on payments involving BNPL.