Buy now, pay later? Behind boom, cause for caution

NEW DELHI: There is a new dimension to cashbacks and rewards points on shopping, and it is given if you sign up for a new payment option that lets you split your purchase or just pay up later.

That’s precisely the lure that drew Dhaval Doshi, managing director of technology company Location Bank India, into getting not one, but three such cards. “With Slice, LazyCard and Uni cards, I’m enjoying points and rewards in addition to my credit cards. I now have tons of cashback to play with,” he says, adding that he pays off dues immediately.

Buy now, pay later (BNPL) is a growing payment instrument in the country. Latest numbers by fintech firm Razorpay indicate BNPL transactions grew 637% in 2021 (along with a 104% annual growth in online payments), followed by 569% growth in the previous year.

“Estimations show that the BNPL market, currently worth $3-3.5 billion, will shoot to $45-50 billion by 2026. Moreover, the customer base may rise tenfold as well,” says Hitashi Garg, vice president, PhoneShop at Cashify, a platform for selling used tech.

Driving the boom is a pandemic-induced, broad-based acceptance of digital payments, easy know your customer requirements and credit history checks, and, most of all, a deluge of cash backs and discounts.

But experts are now concerned that the rush and easy accessibility could make people lose track of finances or promote reckless behaviour, eventually creating debt traps.

“Over the last few years, we have seen a structural shift in consumer behaviour. The younger age group is not averse to buying on credit,” says Dhruv Jain, CEO at CASHe, a credit platform.

But, as Joshi’s says, the switch is not without issues.

“This isn’t working for me because I don’t have any visibility,” says Doshi, who now finds it tedious to keep track of due dates for different cards.

“I like to look at my bank account and know what’s my state of liquidity.”

The BNPL win-win

Largely, there are two ways in which users can access BNPL options. The first is through new age credit cards. Transacsee

tions made on these can be divided into equal repayment instalments and often at no additional interest.

The second is through embedded payment methods on shopping websites, such as LazyPay and Simpl, which are accepted by thousands of merchants at present.

In the first category are cards by Slice, LazyCard, PostPe and Uni. The four are issued on the Visa network and often bundle big cashback offers.

“BNPL mainly started as solution to offer convenience of deferred payment, like the khata system followed by general stores.

Over time, it evolved and now mainly comes in two avatars to serve two distinct purposes - convenience and affordability,” says Anup Agrawal, business head, LazyPay.

Such methods make sense for merchants because they bring easy credit to small transactions, a facility that spurs spending. “BNPL is seen as a revenue driver by merchants. Without this, many consumers won’t be able to purchase goods, and merchants would

significantly lower conversions,” says Khilan Haria, vice president and head of payments product, Razorpay.

BNPL services are now embedded as a lending component too on e-commerce platforms.

Smaller town drive growth

It is almost intuitive then that one of the biggest drivers of this growth comes from India’s smaller towns, where credit card penetration is low. “At LazyPay, around 60% of the demand for BNPL is coming in from tier-2 and tier-3 cities,” says Agrawal.

At the heart of this is how easy it is to sign up.

“BNPL value proposition as an alternative to credit cards and the ability to serve users with weak or no credit history, lack of financial documents, and low-ticket credit requirements is playing a major role in volume growth in smaller towns,” says Ashish Gupta, founder and chief executive, Benori Knowledge, a research and analytics firm.

As many as 46% of users deploy the pay later payments options more than once a month, with popular use cases being online shopping, food delivery and bill payments, data by consultancy firm Redseer indicates.“It is estimated that India’s BNPL will rocket to $45-50 billion by 2026,” says Varun Chopra, founder and CEO of fintech firm Eduvanz.

There’s also increasing internet penetration, alongside the fact that smartphone adoption is spiking.

“In the past few years, these cities have seen a sudden boom in technology with most people owning a smartphone. This had led to an increase in online shopping, helping cashless payments methods like pay later to gain hold,” says Cashify’s Garg.

Financial stability, or the lack of it, during the coronavirus pandemic, too played a role.

“The pandemic accelerated the need to have access to formal credit at affordable rates, so that consumers could manage their daily expenses,” says Dheeraj Aneja, senior vice president and head, fintech and payments group, Flipkart.

Large shopping platforms like Flipkart and Amazon have their own pay later options in place. Amazon Pay Later had already clocked 2 million users in July last year.

Flipkart says there are 100 million consumers who can access Pay Later, a base they want to activate and engage. Flipkart’s Aneja believes the flexible repayment options are especially attractive to students and those who may be presently unemployed.

The looming dangers

It is important to keep in mind that any credit line can potentially impact your credit score. Think of every BNPL transaction as a loan.

The BNPL credit doesn’t get reported, treated and weigh on your credit scores the same way a credit card but as a loan.

“We report your expenditure in the name of a consumer loan to the credit bureaus,” say the FAQs for Slice card. Uni also confirms this enables you to “use the loan through the card”.

In other words, when you sign up, you are essentially signing up for a short-term loan.

For users who start transacting regularly with BNPL products, there is a risk that they may not understand the possible long-term impact on their credit score which, in India, is logged by four credit bureaus – CIBIL TransUnion, Experian, Equifax, and CRIF Highmark.

All lenders, including banks, check for a good credit score before issuing loans and credit cards.

Cashify’s Garg isn’t convinced that all users know what they’re getting into. “We can say that how knowledgeable people are about the relation between credit reports and BNPL payment option is highly variable,” he says.

People may not have complete understanding of how credit scores are impacted by the volume and value of loans taken, as well as the repayment patterns. “It is a fact that buy now, pay later options loan money just like any other credit option,” he says.

Easy credit also poses the danger of overstretched spending, especially when these are offered with minimal background checks.

“Due to the availability of credit on a click and zero or soft credit checks on users, usually millennials over leverage the credit, thereby leading them to fall into a debt trap, or late payment penalties,” says Gupta of Benori Knowledge.

Then there is the danger of a user’s incomplete payment history being reported to the bureaus, which can negatively impact the scores.

EXPERTS ARE NOW CONCERNED THAT RUSH AND EASY ACCESSIBILITY COULD MAKE PEOPLE LOSE TRACK OF FINANCES OR PROMOTE RECKLESS BEHAVIOUR