How BNPL is the Next Big Thing for the Finance Future

Panel Discussion

Mani: Let’s start the session by understanding India’s Buy Now Pay Later industry scenario and global perspectives.

Madhusudanan: Let me begin by saying that it is essential to give a framework for what BNPL could mean since, in many markets, it operates with subtle changes.

Historically, BNPL as a construct has existed for a long time, probably many decades. So, it can be described as just “old wine in a new bottle”.

Fundamentally, credit cards were a form of Buy Now Pay Later. And there have not been any genuine innovations in the core construct of the product itself yet.

Consumers who adopted a financial product similar to BNPL realised that merchants wanted to subvent, meaning they were keen on preceding some of their margins to ensure that sales happened. Therefore, the core of the product construct was that if sales happened, and if credits were going to facilitate those sales, then merchants were ready to take a small cut. This is the premise on which credit cards started. The same principle applies to BNPL but in a better construct.

Hence, many financial companies started providing BNPL to other businesses by tapping into segments that credit cards could not solve in the USA.

The needs are very different in a hugely growing consumption credit market like India. You have very early New-To-Credit borrowers who have yet to avail of a formal credit facility. Banks and other FIs generally avoid extending credit to such borrowers because they cannot prove creditworthiness since they never availed credit. Without a proper credit score, it was difficult to take loans. Thus, BNPL is such a product that breaks this vicious cycle and gives opportunities to NTC borrowers to avail credit to meet their needs and establish their creditworthiness.

In India, BNPL started as a credit builder, and gradually this market grew as more and more people started getting into the formal credit ecosystem. And in an established market, it is more a product arbitrage than anything else.

Buy Now Pay Later has been a hot topic in the late 2010s and even in the early 2020s of the financial market.

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Chayan: Lending as a product has existed since the Great Depression. As early as the 1900s, we used to see ads in the US like “paint your house now, and pay after 6 months”, “buy a piano and pay after 3 months”, or “ buy a sewing machine and pay after 10 months”. The first category, which established a form of Buy Now Pay Later, was sewing machines, which became a household product. Then came credit cards around 60 to 70 years ago. All these products appeared in a time when humans were not as connected as we are now, so what didn’t change were fundamentally two things:

• how do you acquire, onboard and deliver a lending product
• how the experience is when a customer is using the lending product.

Questions also arise, such as

1. Who is getting the lending product?
2. Is every lender using the same data sets that established banks and other FIs are using to underwrite?
3. Are they looking at alternate data sets to underwrite our customers?

Given all of these, BNPL came into the era where it is mobile-first, so the underwriting of customers is much easier. The user experience is also much more tightly coupled with better facilities. Hence, even in established markets like Japan, Australia, and the USA, credit card usage is plateauing over time. Additionally, usage of a product like Buy Now Pay Later is going upwards, similar to a rocket ship. It may still be small compared to credit card usage, but the growth trajectory is just phenomenal. Thus, in this established market where everything is overbanked, a unique product, BNPL, is just the right thing to work.

Gorav: BNPL is undoubtedly something that has been in existence for quite a while in a form. My memories go right from the days of kirana shops, whereby customers have been enjoying the Buy Now Pay Later privilege. We can all relate to those merchants maintaining pocket diaries and having credit debt details available of their customers. The customers clear their debts once they used to get their salaries. This arrangement operated at zero cost to the customer, and the merchants intended to extend credits. The customers also used to have more purchasing capacity.

Buy Now Pay Later is just a glorified version of the above traditional credit merchants offer. It is a triparty arrangement where a customer is involved with a fintech component and the merchant. This also provides incredible purchasing power for the customers.

Kumar: I believe BNPL is a vehicle for financial inclusion. The form factor in which it penetrated the market and the ease of access it inherently provided is the biggest advantage that has been seen. We can tap into segments that previously never provided opportunities. This product has been repurposed for the sole requirement that anyone can easily access it and fulfil their needs. Suppose Buy Now Pay Later is done right, like most major financial players globally. In that case, it can build borrowers’ credit scores and take them to areas where they can eventually start looking at larger credit pipelines to establish their creditworthiness and improve their credit behaviour. BNPL is the delivery mechanism that enables all of these.

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Mani: Can you tell us the difference between credit cards and Buy Now Pay Later?

Madhusudanan:

1. Credit card is a more structured product than Buy Now Pay Later.
2. Financial institutions run credit cards where their business rule engine determines customers’ income levels to know how much credit line they can provide. Credit card offers are generally made under certainly established underwriting mechanisms by banks and other FIs and only in card forms. Whereas Buy Now Pay Later can be in products where let’s say, your food delivery app can offer or your grocery store. BNPL, in its purest form, can be only merchanted or a fintech platform that can aggregate merchants and operate, or a bank that uses it as an opportunity to acquire more customers.
3. Some private banks are also taking advantage of building BNPL as a layer on top of their credit card business right so that customers who come in for BNPL will graduate into a credit card product over time right. This product is booked as an entry product and acts as a credit ladder to build customers’ credit profiles.
4. Buy Now Pay Later will be a feeder to the credit card business eventually at some point in the future. It is built for the new world. It can be integrated into a merchant app, or it can be in card form, or it can also be in UPI or QR solutions.

Chayan: To add one more point, credit cards operate on a minimum ticket size amount, whereas BNPL can provide credit even on much smaller tickets. For example, in Malaysia, $15 is the ticket size for BNPL, and $150 is the minimum ticket size amount for a credit card.

Mani: How does Buy Now Pay Later affect the payment industry from a merchant’s perspective?

Chayan:

1. BNPL helps to increase a merchant’s basket size.
2. It helps bring new customers who can’t afford to pay now but gradually over time for their purchases.
3. Customers’ user experience is much easier, and depending on merchants makes it easier to pay for their purchases.
4. If someone doesn’t have credit and wants to make purchases, with BNPL, it is technically possible to register on the fly to get a credit line and avail to make his purchases. And merchants are willing to go that extra mile.

BNPL is such a cool thing that suddenly, everybody (from merchants to their customer and credit providers) are jumping into this bandwagon.

Mani: How does an NBFC or a fintech incorporate Buy Now Pay Later into its lending business?

Gorav: BNPL, a POS credit product, has become many people’s favourite payment alternative. It enabled millions of people globally to make purchases to meet their mandatory needs. this propagation has made bnpl a very lucrative business opportunity, and every fintech and nbfc is hoping to get a share of the pipe. 

Starting a BNPL business is not a tough task for a fintech or an NBFC with sufficient or at least little digital presence. It is comprised of three primary components. 

• First, we have to identify the product, the target customer and the vendor. This typically takes place with the help of collaboration with various e-commerce platforms or chains of stores; for example, it could be luxury or any consumer product.
• Secondly, identifying the technology, in other words developing an app which will host the bnpl business like Cloudbankin.
• Finally, identifying and complying with the required regulation because, ultimately, what matters is whether you are operating in a regulated environment, which is very particular considering how RBI is looking at things from their perspective.

Mani: What is the role of NBFC-AA in BNPL?

Kumar: As BNPL has evolved, it’s always been a fight between quality and quantity with minimal friction. Challenges arise when

• When minimal underwriting is done to onboard a customer to use BNPL, resulting in higher credit costs because of the minimal availability of data.
• And also, it is difficult to have a 360-degree footprint of the customer because all the data sets pertain only to the asset of a bank or any FI.

The alternative to the above challenges of AA is 

• All the BNPL providers can access customers’ financial accounts via Account Aggregation Framework subject to their consent.
• It allows BNPL providers to state upfront how much data they want for how much time and their end-use. 

There is a constant evaluation of the customers’ transactions activities. It is much richer and more authentic as providers have access to recent financial behaviour. Underwriting of a customer can pretty much be done sitting on top of the transaction data in real-time. And that opens a whole list of possibilities for BNPL lenders to push the envelope even deeper into the finance ecosystem.

Mani: Kumar, a follow-up question to your previous explanation. On the cost front, how much can it be reduced from an AA’s perspective?

Kumar: The BNPL ecosystem is evolving at a specific rate, but currently, it is as simplified as possible. The entire pricing model is pay-as-you-use. The cost is going to be per application per user as all the frequencies like consent provided by customers to access their data; data flows to Financial Information User (being the BNPL lender); how long the consent should be valid; or how many times data is pulled within the consent expiry date, are made available upfront. It allows a clear understanding of the file cost for underwriting, and more importantly, the entire file cost gets capped because, apart from compliance requirements, every other step of the underwriting Journey can sit on top of the transaction data. Hence in the case of BNPL, lenders can do KYC and bureau scraping of their customers via mobile number, and everything else can be taken care of by transaction data. So, for BNPL lenders sitting on top of AA is going to become extremely economical.

Mani: What is the role of banks in BNPL?

Madhusudanan: There are three roles that banks can potentially play in Buy Now Pay Later.

1. Banks can act as a great source of capital provider. NBFCs, or mainly the BNPL providers, can take much of the heat around credit cost and more. So, there’s definitely a scope for banks as capital providers.
2. Banks are also to partner with some of these bnpl providers for co-lending opportunities. This means there’s a certain degree where the bank inherently does not want to underwrite and take all the risk on its own. They can partner with some fintechs. Then, they start co-lending, which allows the fintech partner to get better economics with respect to the cost of capital, which can be passed onto the customer.
3. Banks looking at BNPL opportunities themselves. Many bankers are thinking along the line, “Can we have our own BNPL model?” So, if banks can onboard large corporate merchants, it also gives them a chance for NTC customer acquisitions.

Mani: What do the regulations look like from Buy Now Pay Later standpoint?

Gorav: BNPL as a concept is certainly welcomed by all sorts of participants in the industry, which includes the regulatory framework as well. The circular that came out on June 2022 is neither a new guideline nor a notification separately or a standalone from either the RBI or the NPCI. It is basically a clarification given by RBI that its Master Direction does not permit the loading of prepaid payment instruments (PPIs) using credit lines. Several fintech credit card companies followed it and have existed for some time. These companies typically tie up with banks or NBFCs and offer credit lines into their prepaid wallets, and if such practice is followed, it should be stopped immediately. 

Mani: How does Buy Now Pay Later help merchants?

Chayan:

• It helps to better the payment experience because most commerce is happening digitally now.
• It helps to bring New-to-Credit (NTC) borrowers. 
• And obviously, it brings in more customers, thereby increasing the basket size of a merchant.

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Mani: What are the risks and challenges of BNPL?

Madhusudanan:

• Firstly, there is a balancing act between growth and how much loss a BNPL lender can stomach. Since it’s a credit business, credit is the biggest risk here. 
• Second, BNPL is layered on top of an existing credit or a debit card, so customers can split their payment methods for any purchase via credit/debit cards + Buy Now Pay Later or via BNPL as a whole, but at the end of the month, it’ll get tagged to their credit card product. Hence, collection infrastructure does not exist in this product simply.
• Third and last, whenever there is a point where the whole world is going through inflationary pressures and such a crisis, normally, a credit card is the first product to get defaulted. People can timely pay their rent or pay for their kids’ school fees but for credit cards and now BNPL even more, they postponed paying their interest/EMI on a later date. This can actually create havoc in their overall debt scenario.

Mani: With the rise of fintech entities of size, scale, and consumer impact, how are the NPAs looking? 

Gorav: Certainly, we cannot rule out a situation of what if a customer buys now but doesn’t pay later. That’s the NPA situation. Having said that, BNPL is an evolving industry at the moment and is currently in the very entry stage. It is too early to predict the NPA patterns.

Mani: How would you describe the role of technology in BNPL?

Chayan: From customer identification, onboarding, delivery, service marketing, and engagement to collections, BNPL has seen a sea of total change due to technology playing a major role. Technology has ensured operational costs are minimal for BNPL providers because they launch everything digitally. India’s payment ecosystem is also progressing towards being a completely robust ecosystem. Overall, it lowers the cost and manual intervention of doing BNPL business.

Mani: How can NBFC-AA help strengthen the lifestyle of customers of BNPL lenders?

Kumar: If you look at the number of Institutions that are started pushing their data into the AA ecosystem and the number of accounts that have been made available, there are little more than 1.1 billion accounts. So that means across all of the large public and private sector Banks, the current and savings accounts have been pushed into the ecosystem for potential FiOS to use. This is where lending as a place starts becoming extremely interesting, and AA comes into the picture because all that is needed is just a mobile number to link a financial account and a customer to provide consent on how long they are going to be sharing the data with their BNPL lender. The entire credit life cycle of that customer can be tracked based on their transaction activities. Thus, there is a constant pull of data happening that goes to the lender. They can make sense of it and identify when they can re-prioritize which customers for a top-up or collections or identify these set of cohorts of customers to be pushed for potential recoveries and collections. 

From a customer’s experience standpoint, all the customer will provide after the basic compliance requirements (or KYC) is a single bank account or a single mobile number linked to all the multiple bank accounts. It’s very similar to UPI. But what flows instead of payments is data, and the entire account aggregation ecosystem that’s evolving is the largest open banking initiative across the globe. The different types of data sets that are going to go into the ecosystem are transaction data, insurance data and much more wealth of data. Hence, any BNPL lender can get a 360-degree view of their customer then and there with a simple mobile number, which is the potential that the account aggregator ecosystem offers. Revolution is rapid, as can be seen. There’s been a lot of regulatory push for all of the financial information institutions to push their data. This is just the beginning, and more entities will participate in the ecosystem.

Ending Words

We hope you learned a lot from the experts in the field who shared their knowledge on Buy Now Pay Later. If you like this kind of content, remember to check back for more upcoming blogs from Habile Technologies!