How ‘Buy Now Pay Later’ is changing the lending landscape in India

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July 15, 2021 5:50 PM

BNPL emerged as more than a convenient payment method; it essentially decreased the financial burden on borrowers by offering no-cost EMIs.

rupeeThe question is whether RBI will be able to contain the market or whether there will be an increase in nervousness, leading to greater volatility in the rupee.

Buy Now Pay Later (BNPL) has grown to become a prominent form of financing over the last ten years, especially with BNPL specialists such as Affirm and Klarna gaining popularity. In India, the demand for BNPL has been growing for about 2-3 years, further accelerated by COVID-19. The pandemic-induced economic changes drove people to look for ways to fund their purchases, including essentials. BNPL emerged as more than a convenient payment method; it essentially decreased the financial burden on borrowers by offering no-cost EMIs.

The Pandemic Propelled a New Trend
Consumer demand for e-commerce services increased due to the lockdowns. BNPL helped customers break down large expenses into smaller, interest-free EMIs, rather than having to dig deep into their wallets. BNPL not only eased purchases of daily essentials but even brought aspirational products within reach.

Trends and projections indicate a bright future for the symbiotic relationship between e-commerce and BNPL. Driven by consumer demand, the Indian e-commerce industry is poised to grow to become a $99 billion market by 2024, says Goldman Sachs. At the same time, BNPL will become the fastest growing online payment method, from a 3 per cent share in 2020 to 9 per cent in 2024.

A Popular Trend Among the Youth
India is home to one of the world’s largest millennial and Gen Z populations. These demographic groups are increasingly contributing to the exponential use of smartphones and prefer seamless digital payments.

BNPL is a fast and convenient option for all these consumers. The registration process is simple and can be initiated and completed during checkout on e-commerce sites. Customers receive real-time approval and don’t have to deal with cumbersome paperwork. These merits speak directly to young individuals, who are digital natives and are accustomed to lightning-quick speeds and convenience at their fingertips.

As being card-averse, these individuals gravitate towards virtual credit options. Various statistics reflect a lower allure of credit cards in the US and Europe’s millennial population.

Most importantly, BNPL offers a formal micro-lending product in an informal, user-friendly manner. It is an agile solution that appeals to today’s youth, known for their need for instant gratification. Also, with BNPL, the financial burden that many families face during the festive gifting season is lowered. They can make the purchases they desire, paying for them through easy, small, no-cost EMIs. No purchase is too small for BNPL.

An Ongoing Growth Story
BNPL boosts conversion rates and average order values (AOV) for merchants by lowering shoppers’ purchase hesitation. BNPL is expected to continue to rise in popularity as a payment method with benefits for all players.

A Q4 2020 BNPL survey predicted that BNPL would grow by 65.5 per cent in India, reaching a value of $11,570.7 million in 2021. The adoption of this payment mode is expected to rise at a 24.2 per cent CAGR from 2021 to 2028, taking the gross merchandise value of BNPL in India to $52,827.2 million by 2028, from $6,990.5 million in 2020.

The Path to Financial Inclusion
Due to low credit card penetration in India, supplemented by traditionally strict eligibility criteria to avail formal finance, there exists a sizable under-served population with little or no credit histories. This situation perpetuates a cycle wherein people seeking formal credit are turned down due to unavailable or inadequate credit scores. With BNPL relying on alternative data sources for underwriting, new-to-credit customers are integrated into the country’s formal financial ecosystem.

The move to digital solutions is expected to rise through this decade. And, with the accelerating penetration of smartphones and internet connectivity across India, the reach of BNPL payment providers is only likely to grow.

by, Ankit Satsangi, Chief Risk Officer, Capital Float

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