Here, you can have your favourite designer boots! And guess what? You can pay for them later as per your convenience!
Sounds tempting, right?
‘Buy now, pay later’ offers have taken the Indian markets by storm. Pioneered by the Swedish company Klarna, Buy Now Pay Later (BNPL) is a short-term credit model that enables consumers to make purchases and defer the payment by 30-45 days, often interest-free, or for a minimal interest. The idea behind BNPL is to split the payment due, at the point of sale, to offer customers the option to pay in smaller and more “affordable” instalments. This idea has prevailed in our local grocery stores for a long time, so why all this buzz now?
BNPL has emerged as the hottest credit revolution owing to its seamless integration into e-commerce platforms. This integration has been accelerated by the COVID-19 pandemic. A report from Worldpay, the payment processing firm owned by FIS, states that global e-commerce transactions totaled $4.6 trillion last year, 19% higher than in 2019, of which 2.1% — or about $97 billion — was constituted by BNPL. Worldpay expects this figure to double to 4.2% by 2024 (Browne, 2021).
Various companies such as Klarna, Affirm, and Paypal provide the BNPL facility. Owing to its increasing popularity, BNPL has swiftly found its way into food, fashion, and numerous other major industries.
How does Buy Now, Pay Later work?
All companies have different ways to execute their BNPL schemes, but the scheme works along the following lines – a consumer makes a purchase at any given shop and opts for BNPL at the checkout. If approved, the consumer is informed within seconds and is expected to make a small down payment – 20% of the amount, for example. The shop receives the payment immediately via the company through which the consumer has applied to buy now, pay later. The consumer later repays the company in instalments, via debit cards, credit cards, and other media.
Why did BNPL become a hit?
Since the BNPL scheme provided people with unwavering and relentless financial support during the pandemic, it has become immensely popular. Further, the following factors contribute to its admiration.
Instant gratification across demographics: The impulsive youth of today operates on whims and fancies to buy anything and everything. However, their low purchasing powers and volatile credit scores had previously barred them from doing so. BNPL gatifies their caprice by granting instant credit, convenient repayments, and soft credit checks that do not impact individual credit scores. Consequently, 50% of the BNPL users are millennials and Gen Z.
Easy KYC, no exorbitant charges: BNPL enables one to enjoy maximum credit (within the accorded limit) with minimal KYC. The payment charges are upfront and do not include any complex credit calculations, hidden charges, etc., nor do they demand OTPs or recharging of e-wallets to make transactions.
Psychological factors affecting BNPL: The growth of BNPL is given further impetus by mankind’s intrinsic psychological characteristics. There is a renowned love-hate chemistry between spending money and the pleasure of enjoying what you’ve spent on. Opting for BNPL at the checkout allows the consumer to relish their shopping without the corresponding guilt of overspending. The psychological ‘pain of payment’ is greater in payment modes such as cash, credit cards, and debit cards. This is explained by Dr. Carey Morewedge, assistant professor at Carnegie Mellon University, with a simple formula:
Cost of your item/pool of resources (cash/BNPL/others) = Pain of paying (Factors and Psychology Behind the Great BNPL Allure, 2021).
BNPL in India
BNPL’s success in India can be attributed to the fact that it offers formal credit in an easy-to-access way. In 2021, only 30 million out of the 1.3 billion people in India held unique credit cards (Sridharan, 2021). Thus, BNPL is a plausible solution to bridging the huge gap between consumers and sellers.
With more keypad literate Indians and the rapid development of e-commerce during the pandemic, consumer behaviour is now impossible to reverse to its non-digital, pre-covid state. This has consequently helped in the growth of BNPL. Redseer estimates India’s BNPL market will rocket to $45-50 billion by 2026 from $3-3.5 billion, with a staggering 80-100 million BPL users. (Buy Now, Pay Later Said to Surge over Ten-Fold in India, 2021). However, presently, the maximum credit offered is of Rs 1,00,000, much lower than what credit cards offer, thus, analysts of Macquarie Square believe that there is some time before BNPL disrupts card markets (Anand et al., 2021).
The potential downside of BNPL
Despite how alluring it may sound, in reality, BNPL isn’t all roses. Critics of BNPL suggest that consumers take huge debts under BNPL and falter in repaying these. BNPL also attracts those who are already failing to make existing bill payments. 55% of consumers admit that they tend to spend more using BNPL than the traditional payment methods (Lake, 2021). There is evidence that 31% of BNPL users consider their financial health to be “dire” or to be “struggling”, in contrast to “managing” and “thriving” (Shevlin, 2021). Failing to repay within the stipulated time window, the lender can charge interest on the unpaid or late amount, thus creating the possibility of falling into a debt trap and ruining one’s credit score, if not utilised wisely.
BNPL: Progress and Path for Future
The percentage of Gen Z users in the US for BNPL increased six-fold from 6% in 2019 to 36% in 2021, while millennial users also doubled to 41%. Gen X users tripled while baby boomers are still getting into the game (Shevlin, 2021). It is expected that on the whole, consumers will spend nearly $100 billion in retail purchases using BNPL in 2021 up from $24 billion in 2020, and $20 billion in 2019 (Shevlin, 2021). Reports from the Bank of America, December 2020, predicted that the BNPL market could grow ten to fifteen times by 2025 and process between $650 billion and $1 trillion in transactions annually (Musbach, 2021).
It is worth mentioning that BNPL is not a fad and is here to stay as it has increased average order value (AOV) and decreased cart abandonment rate and consumer acquisition cost. BNPL certainly provides more flexibility and the feeling of being in control over one’s finances. The fintech revolution has explicitly demonstrated that wherever there is the need to remove financial friction, BNPL is inevitable to follow.
Khushi Heda is a second-year student of Economics at Indraprastha College for Women.
References
- Factors and Psychology Behind the Great BNPL Allure. (2021, July 16). Https://Medium.Com/. https://medium.com/m2p-yap-fintech/factors-and-psychology-behind-the-great-rise-of-bnpl-9f3bfabc5522
- Musbach, T. (2021, April 15). The future of buy now, pay later. Https://Www.Affirm.Com/. https://www.affirm.com/business/blog/buy-now-pay-later-future
- Shevlin, R. (2021, September 7). Buy Now, Pay Later: The “New” Payments Trend Generating $100 Billion In Sales. Https://Www.Forbes.Com/. https://www.forbes.com/sites/ronshevlin/2021/09/07/buy-now-pay-later-the-new-payments-trend-generating-100-billion-in-sales/?sh=674c4d192ffe
- Browne, R. (2021, July). How buy now, pay later became a $100 billion industry. Https://Www.Cnbc.Com/. https://www.cnbc.com/2021/09/21/how-buy-now-pay-later-became-a-100-billion-industry.html
- Lake, R. (2021, July 26). Buy Now, Pay Later. Https://Www.Investopedia.Com/. https://www.investopedia.com/buy-now-pay-later-5182291
- Buy now, pay Later said to surge over ten-fold in India. (2021, November 8). Https://Economictimes.Indiatimes.Com/. https://economictimes.indiatimes.com/industry/services/retail/buy-now-pay-later-set-to-surge-over-ten-fold-in-india/articleshow/87586258.cms
- Sridharan, S. (2021, October 26). OPINION: The next four-letter word taking the world of finance by storm. Https://Www.Businessinsider.In/. https://www.businessinsider.in/finance/news/opinion-the-next-four-letter-word-taking-the-world-of-finance-by-storm/articleshow/87260681.cms
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