Abstract:

Buy Now Pay Later (BNPL) was introduced as the next “big thing” in consumer finance, seducing an entire generation with a great pitch. After all, it was positioned not as credit, but rather, as debt with no interest. The Covid-19 pandemic witnessed a dramatic shift in consumption patterns; job losses and pay cuts slashed consumers’ purchasing power. Quite strategically, BNPL chose the right moment to tap into a natural human tendency: spending more than you need and at the point of greatest vulnerability, i.e., checkout. It seems smart, like a financially responsible alternative to credit cards which have been branded as the antithesis of responsible financial behavior. On face value, it does sound like a good deal. It enables consumers to enter the financial credit fold, something which is often difficult to do with credit cards. More importantly, it helps one plan their spending without worrying about bottoming out into a hole of exorbitant interest rates. On the other end of the buying-selling spectrum, merchants love BPNL – it increases basket size (by almost 3.5 times) and purchase frequency. It is no surprise that projections for the BPNL market in India are hugely optimistic – the number of BPNL users is expected to increase to 80-100 million, a sharp upturn from the 10-15 million users today. BNPL annual disbursals are also expected to grow from approximately 3% of India’s total credit card spends in FY-2021 to approximately 15%-20% by FY-2026.

At the forefront of this change in digital transactions is a newer generation – Gen Z, prioritizing flexibility and transparency over traditional methods like credit cards that require tedious documentation processes and good credit scores. BPNL eliminates those pain points and offers a frictionless, short-term financing solution, especially to consumers who don’t have a traditionally good history with credit. However, the problem with having mass consumer appeal is that somewhere, deference to regulatory soundness is compromised. Not only do BPNL services offer only soft credit checks, augmenting the risk of default, but consumers are also psychologically inclined to spend beyond their means. BPNL is deeply integrated into the shopping-and-buying experience – making it easy to just tap and buy, even when you cannot afford to. The impulsiveness of such purchasing decisions racks up increasingly high amounts of late fees – the primary source of income for BPNL providers. Since BPNL’s impact on a user’s credit profile is the same as any other loan, even one missed payment can hurt their credit scores and make it difficult for them to apply for higher-ticket loans. The marketing strategy of BPNL was always based on “zero financing, zero fees”, an idea that is technically incorrect. If you miss a payment, you will incur a penalty, and this penalty is often higher than

those charged by credit card companies. It is easy to get lost in the ease of “planning your spending” through new gen, alternative financing measures; however, payments tend to stack up over time. According to TransUnion CIBIL data, 60-days past due delinquency levels in the BNPL segment were as high as 18 percent, which is twice that of non-BNPL products. This should be enough to sound warning bells.

The Reserve Bank of India did take note of this emerging shift in digital lending and responded with new guidelines, according to which nonbanks can no longer load prepaid instruments — digital wallets, or stored-value cards — using credit lines. The only valid options for a buyer are to prefill their wallet with cash or to debit their bank or credit card accounts. This serves as a blow to BPNL providers who had been treading a grey area by employing a “Rent-a-NBFC” model. Here, the fintech in the middle starts offering a first-loss default guarantee up to a certain percentage of the loans underwritten by a nonbank financier. This introduces credit risk on the balance sheet of digital intermediaries who don’t have to maintain any regulatory capital. In some cases, the Lending Service Provider, as a non-banking

non-financial company (NBNC), may be undertaking balance sheet lending in partnership with a bank/ NBFC or on a stand-alone basis, while not satisfying the principal business criteria to remain outside regulation. Either way, recent practices by BPNL providers have amounted to regulatory arbitrage and attracted the ire of governing agencies. The way forward is to prove that BPNL can be an economically sound and beneficial model, both for its consumers and for the stability of the banking system.

While RBI’s move attracted backlash and public outcry, it remains a commensurate measure to protect consumer welfare. The development of the financial system has given us technological advances that would have seemed impossible a few decades ago. Digital infrastructure in India has progressed by leaps and bounds. The question is, what are we doing with this abundance? Services like BPNL do allow for more financial flexibility; however, in the hands of a generation that acquired financial literacy through social media, they need to be regulated. Nothing good comes out of convincing an entire generation to spend more than it can afford. Torched credit scores and unmanageable debt deters individuals from starting businesses and families, both building blocks of our economy and society. Governing agencies and fintech companies need to work in tandem to create sustainable pathways towards a future, that is clearly digital.