By Dr. Chandrima Sikdar
The RBI has announced new norms and guidelines for BNPL players amid reports of increased irregularities. There is a possibility that these interventions will temporarily slow down the BNPL industry and reduce consumer demand. The impact will, however, not last long. The industry and consumers are likely to adjust to a more sustainable transaction mode. As a result, consumption is likely to return without any consequent impact on savings.
The Indian economy has traditionally been driven by consumption. The BNPL option has given consumers more flexibility while shopping without worrying about the high-interest charges which are associated with credit cards. Consumers can defer payments until the end of their billing cycle with BNPL. For payments made within the credit period, the short-term funding solution splits repayments into flexible instalments without interest. This mode of transaction gained popularity across the world during the Covid 19 pandemic when e-commerce volumes soared, and India has been no exception. This popularity has since been moving upward and as per present data reported by Experian, the BNPL transactions in the country have surged by 22 per cent during the first half of 2022 and this is 3 per cent more than the global growth.
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Consumers’ shopping habits and the way eCommerce works have changed due to the advancement of technology. BNPL replaced the old traditional methods of using credit cards, which were once considered the primary source for delayed payments. However, since the past few years, banks, e-commerce companies and fintech players have increasingly moved towards offering BNPL schemes to consumers. Like credit cards, BNPL as a scheme enable consumers to purchase now and pay later with an interest free period. But as compared to credit cards BNPL scores higher in terms of ease of access and of use, payment experience and pace of transaction. Hence for small ticket purchases this has became a more preferred payment option among consumers.
However, these very features which make BNPL a preferred finance option have often been the outcome of diluted KYC processes, inadequate checking of credit history etc. This led RBI to intervene and tighten norms related to the industry. Under the new RBI guidelines, non-banking institutions cannot use credit lines and issue pre-paid payment instruments to consumers.
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Such regulatory interventions are undoubtedly going to act as a retarding force on the mindboggling pace at which the BNPL industry has been expanding. But this retardation is likely to be temporary. The industry which is currently at infancy has already shown enormous growth potential with large tech players entering the space. Hence it is only before time that the industry together with the regulator works out a more sustainable business model that is economically sound and mainstream. These factors from the supply side together with India’s historically strong demand side is likely to push the BNPL industry towards a new equilibrium where it is more in sync with the regulatory requirements. And this will in turn bring back the consumption hit by the recently announced regulatory requirements.
(Dr. Chandrima Sikdar, Associate Dean, School of Business Management. Views are author’s own.)