In the pre-Covid time, more than 60% of all e-commerce transactions in India used to happen via cash but that has drastically changed now.
Using plastic money has always been a popular way of purchasing goods and services as credit cards come with an interest-free period. Now, there is an alternative to credit cards which works somewhat in a similar way. ‘Buy Now-Pay Later’ or BNPL finance lets you keep buying the stuff you need and pay at a later date. A word of caution: Like credit cards, BNPL may also land you in debt if not used properly and only aimed at instant gratification.
FE Online in an e-mail interview with Nityanand Sharma, Co-Founder & CEO, Simpl finds out how ‘Buy Now Pay Later’ model works, the charges and benefits of using this new feature.
How does the ‘buy now, pay later’ model work?
Indians have always been familiar with the Khaata system of payments, wherein customers would pay the entire bill at one-go, typically by the end of the month, instead of paying every time they make a purchase.
While this system remains a common practice in small towns and rural areas, we add a fresh spin to the age-old concept of Khaata by digitalising it, which enables customers to enjoy a seamless buying experience without having to disclose their bank details or go through multiple authentication steps.
Users can order food, groceries, medicines, etc., from hyperlocal merchants, etc., using the ‘buy now, pay later’ platform, and just pay the collated amount, later. The adoption of digital Khaata is quickly gaining traction in the country and although the shift is gradual, it would be permanent and will play to the industry’s benefit.
Are credit cards passé? Can this replace credit cards?
The traditional credit card has evolved into ‘Pay-later’ because it truly reflects the way millennial consumers want to buy and pay. Consumers across the globe are looking for better products that offer convenience, peace of mind, transparency and affordability. Credit cards don’t align with the value system of today’s millennial consumers. The reason being high-interest rates, fees and low transparency. It’s not a good fit especially for those who are relatively new to credit and are at risk of getting stuck in a debt trap.
With that being said, there still remains a strong use case for the consumer credit products, but we expect the physical form-factor, product features and user experience to continue to evolve and foresee an acceleration in adoption of ‘pay-later’ and other forms of digitally enabled payment and credit products.
What advantages does it have over credit cards?
The explosive adoption of ‘pay-later’ across the globe proves that there is an incredibly strong product-market fit for ‘pay-later’ as a category because pay-later options are interest-free, transparent, and beautifully embedded into the checkout flow of the merchant. ‘
Pay-later’ is a user experience product as much as it is a credit product. Consumers often seek a superior frictionless one-tap checkout experience and buyer protection which led us to the come up with a platform that helps consumers manage their budget better.
Every consumer in India is aware of the pain associated with OTPs, payment failures and multiple other friction points associated with digital payments. We strongly held belief is that the best payment experience is no experience and the traditional credit cards just cannot suffice what the mobile-first consumers want.
In India, traditional credit cards struggle to scale for three key reasons – first and foremost, consumers that are new to credit often do not qualify because they lack the credit history required by traditional credit card underwriting.
Secondly, traditional credit card models usually incur high marketing expenses to reach prospective customers and therefore also need to give customers large limits to recoup their marketing expenses; yet the data is not there for a large section of the population.
Lastly, Indian consumers have not adopted credit cards for habitual every-day purchases and only tend to use them for infrequent larger-ticket purchases, which in combination with the other factors mentioned above limits the addressable market for traditional credit cards.
Traditional credit cards, on the other hand, are not only rigid in construct but also create brand loyalty with the issuer of the card, the bank – funded and paid for by the merchant. The alignment with merchants is a key differentiator for the ‘pay-later’ category and is also reflected in a superior customer acquisition model right at the point of sale.
What is the interest-free period for the user?
We do not charge customers for utilising our services, the app is absolutely free to use. Once the bill is generated, we provide 5 additional days to our users to clear their bill, and if the bill remains unpaid beyond that, we charge a late fee of up to Rs. 250.
What are the charges in the ‘buy now, pay later’ model including interest rate, processing fee and any other charge?
Most ‘pay-later’ products are absolutely free for consumers who pay on time. Pay-later is an aspirational category that attracts well-intended users that are looking for great user experience when they buy online.
While it helps consumers manage their budget and provides affordability, it is not intended to be a financing product that burdens consumers with high-interest rates and therefore only consumers that fail to make timely repayments incur charges.
Some of the other global ‘pay-later’ leaders have proven that ‘pay-later’ moves key metrics for merchants, including cart-conversion, purchase frequency and basket size. Therefore, it extends beyond payments and becomes a tool for merchants to grow their business.
This symbiotic relationship enables ‘pay-later’ companies to earn a fair share of the revenue for the value they deliver to merchants while being cheaper than a traditional credit card. In general, the fee structure varies across countries and merchant categories but are mostly in the range of 2-7%. Because ‘pay-later’ companies are technology companies as much as they are finance companies, so we can add a lot of value to merchants beyond just facilitating payments.
There are many other ways to enrich the merchant-consumer relationship and we are working on additional product extensions that will further differentiate the ‘pay-later’ category from traditional credit cards and other payment options.
Will digital payment options witness a rising trend in the years ahead?
In the pre-Covid time, more than 60% of all e-commerce transactions in India used to happen via cash but that has drastically changed as most of the essentials and food companies have implemented contactless deliveries to ensure the safety of delivery partners and consumers hence, they have stopped COD as a payment option and people are forced to use online mode of payment to place orders. Driven by the fear of contact with a potentially contaminated surface, the government is also encouraging people to avoid cash payments as much as possible and adopt digital payments.
The need of the hour is to promote digital payments for all transactions including daily essentials. We, at Simpl, are seeing a 40% increase in transactions for essentials from hyper-local merchants, and 40-45% for medicines compared to pre-COVID days and the trend shows an average 1.5x increase in ticket size and a 40% spike in the overall GMV of offline merchant partners as well. This clearly indicates that the crisis might act as a catalyst to push digital payments adoption on a wider scale.