In the early days, people could buy what they wanted only if they had the money for it. Then, consumerism was restricted to just the wealthy. As the world evolved, efforts were made to widen the consumer base by including those who may not have immediate cash but do have the ability or income to pay for the goods and services over time. This concept gave way to consumer loans (car loans, home loans, and an equated monthly installment scheme for purchasing a mobile phone or a refrigerator or a washing machine and so on), hire-purchase, and even credit cards. This gave a huge fillip to consumerism.
Now the world is moving a step further. Loans are being offered to people without a credit history and a near zero interest rate. Gen Z is taking to it like fish to the water. While this is expected to create a huge demand for goods and services and help revive the global economy rapidly, many worry that it is the latest financial pied-piper – one that will lead youngsters into financial ruin. Welcome to the world of ‘Buy Now Pay Later’ financing.
When a customer goes to buy a product and if the retailer offers a BNPL option, he/she can opt for it. The BNPL financier will then pay the retailer and offer the customer a repayment schedule based on his/her needs. If the customer repays on time, she will incur no interest charges. But if they default, interest or penalties will be charged and BNPL companies make money with it.
Benefits of BNPL
BNPL offers access to credit for people outside the formal banking system. According to recent data, fifty percent of all BNPL customers are first-time borrowers (largely GenZ). Low-interest rates, flexible repayment schedules, and the need for credit history have made it an interesting and attractive instrument
Disadvantages of pay later apps
Not considering a person’s credit history and his other liabilities makes BNPL loans risky. While the ticket size of a BNPL is low a customer can take multiple loans from various financiers. This will increase liability significantly and affect his ability to repay.
This could cause a sharp jump in non-performing assets (NPAs). There are estimates which show that defaults in BNPL loans are in double digits. Apart from the risk to the financial system, BNPL also risks corrupting the culture. Indians, unlike say Americans, are careful when it comes to borrowing to meet their needs.
An easy and low-cost borrowing option such as BNPL will force Indians to borrow more than they would have done otherwise leaving them massively leveraged and in a debt trap. This is particularly true with GenZ which is a lot more aspirational. Even without BNPL, India’s household debt to GDP has grown from thirty percent in 2017-18 to 37 percent in 2019-20. In the case of the US, this figure is 77 percent.
Other disadvantages of BNPL services includes impact on your credit scores. The payments defaults and missed payments are reported to the credit bureaus. On top of that, it is difficult to get a refund if the product was defective or did not arrive.
Save now, spend later
Saving enough money to invest is itself a challenge. They do not believe in the adage `Money saved is money earned’. Gen Z is yet to understand that by saving a percentage of their salary, they can build for the future. But most youngsters spend as if there is no tomorrow. They even borrow and spend or use `buy now to pay later’ financial products. Inculcating savings among today’s youngsters is critical.
For some who manage to save, they still end up in financial stress as they make wrong investments due to lack of knowledge. For instance, somebody who is young and is yet to build a significant savings gets lured by the stock market without realizing the risks involved. That person invariably ends up losing his investment. There are times when people end up making wrong investments without understanding their risk appetite. This results in their investments getting locked up for a long time subjecting them to needless pressure on the money front.
BNPL is catching up- latest stats!
It is the hottest thing happening in the fintech space today. The proof is the fact that billions of dollars are being injected into the startups operating in this sector. According to GlobalData, the BNPL industry is expected to reach a size of 166 billion dollars globally by 2023. In India, the industry is set to grow tenfold in the next four years from 3.5 billion dollars to 50 billion dollars. In Fact, in the last two years, BNPL has seen a 45x growth. According to media reports, only 70 million people have access to credit today which means 93 percent of India is outside the formal banking channel. The fact that it is easy to apply and can be done digitally makes BNPL the most sought after instrument when it comes to financing, especially among the youngsters.
BNPL Vs Credit Card (We heard you!)
The biggest advantage of BNPL is that it gives you immediate access to credit without any questions being asked. One does not need to have a proper credit history (something GenZ typically lacks) to avail of BNPL facilities. In the case of a credit card, one needs to first apply, get the necessary approval before the card is issued. In the case of BNPL, there is no annual or joining fee. An important differentiator of BNPL is that the customer pays zero or very little interest (as long as the amount is repaid on time) unlike in the case of credit cards where the interest rates are between 2 to 4 percent per month.
In BNPL transactions, ticket sizes are typically low (maximum of Rs 1 lakh) unlike credit cards but they offer significant flexibility when it comes to repayment.
Major BNPL Players in India
Some of the major fintech companies that offer BNPL options are
- Simple
- Zest Money
- LazyPay
- Flexpay
- Payton postpaid
- Amazon pay later
- ePayLater
- flipkart pay later
Even traditional banks are entering this business. For instance, Axis Bank bought Freecharge from e-commerce firm snapdeal. This includes HDFC bank’s FlexiPay and ICICI bank’s ICICI PayLater.
BNPL is also spreading to other sectors
BNPL as a concept is not only growing rapidly in financing but is also spreading to other sectors. Travel companies have started “Fly Now PayLater” schemes to attract travelers. Insurance companies have also started implementing this instrument to get cash-starved customers to pay their premiums.
While BNPL as a financial option has its advantages but it needs to be regulated effectively. Customers (mostly Gen Z and first-time borrowers) have to be educated properly on amazon pay later and such similar apps, to ensure that this concept of payment does not fail and cause a crisis to the banking system. It is also important for the customers to know the problems that come with these Shop now Pay later apps that include the delinquency rate as well. Having said that, if you are disorganized with your finances, BNPL services are not for you!