The growing acceptance of Buy Now Pay Later

January 31, 2021

Tarun Kumar Kalra

2020 was a year of remarkable shifts and changes in India where the country witnessed millions of individuals make online purchases, spiking its eCommerce market share despite the low accessibility to a physical bank account. The young, urbanized individuals are in search of open banking platforms and seamless ways of transacting digitally.

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Consumer spending trends have transformed during the years, reflecting the change in how the young aspirational individuals view credit and consume financial services. Instant gratification of a purchase coupled with an ease of 0% interest financing is at the core of the recent boom in the “Buy Now Pay later” payment option. This mode of payment is expected to reach 3% of the global ecommerce spend by the year 2023 fuelled by an annualised growth rate of 39% experienced by leading players globally.



The Indian market is ripe for a consumption driven boom riding on the ease and availability of Buy now pay later payment options. India has only 3.33% unique credit card users out of a population of 900 million that consumes banking services, setting the stage for a population that is less inclined to pursue owning a credit card, due to the onerous approval process. This now creates a huge pool of individuals who over a period of time might not be able to build a credit history through use of traditional loan and card services.



0% Financing has been around for decades. This has however gained mainstream acceptance over the last 3 years where leading players like Klarna, Afterpay and Affirm, globally and Simpl, Easy Pay &ZestMoney in India have made it one of the most popular methods of consuming credit.



Data Driven Digital Footprint assessment- Key Differentiator


Credit Risk Assessment and credit checks remain crucial to building a profitable BNPL business. The explosive growth is also creating additional problems related to higher defaults. During the first 9 months of 2020 a leading BNPL player globally witnessed a 35 % increase in credit losses. This reinforces the need to analyse and assess the digital footprints of the borrowers for real time insights and decision making. Access to client data and the ability to make meaningful decisions will provide the much needed differentiation and competitive advantage.



Without any explicit interest rates and penalties, BNPL ensures transparency of data collection and provides benefits for lenders and consumers. The uproar of fintechs in the financial and banking sector recently has given traditional banks and institutions the opportunity to enhance their game.


Tapping into India’s millennial market


The young , aspirational middle class is driving a consumerism boom that is centered on improving their lifestyle and quality of life. BNPL, the unintended beneficiary of the pandemic that accelerated digital transformation last year, has become a force to reckon with today. The market is witnessing an exponential growth of internet and mobile phone users at a rate of almost 50% of the entire population compared to a mere 4% just over a decade ago.


2020 was a year of remarkable shifts and changes in India where the country witnessed millions of individuals make online purchases, spiking its eCommerce market share despite the low accessibility to a physical bank account. The young, urbanized individuals are in search of open banking platforms and seamless ways of transacting digitally.


Introducing traditional banks to adopt BNPL solutions



Banks have traditionally held back venturing into the BNPL space for the fear of cannibalising their Credit Card business. The opportunity at hand and the exponential growth was however too big to miss and the Banks have made cautious inroads into this highly competitive space.



This is in line with the positive impact the presence of fintechs and its innovative strategies has had on conventional banks wherein they have stepped up the level of digitization to keep a share of the market and stay competitive.



PayLater by ICICI Bank, for example, is a mobile-only installment payment plan which allows pre-approved consumers to purchase gadgets and electronics from a number of partner retailers. Similarly, FlexiPay by HDFC Bank has also partnered with a number of retailers to provide pre-approved consumers with payment flexibility and loans of up to Rs 60,000.



I don’t believe there is any debate on whether or not these latest digital services need to be provided for the larger benefit of the Indian masses. BNPL allows banks to offer an alternative mode of payment, especially for the millennials and GenZers who possess strong intent and purchasing power. There is work that yet needs to be done to strengthen the framework that allows for traditional Banks to ride this wave without a spike in the cost of risk.



India’s legal framework in adopting alternative financing solutions



Rapid developments in India’s financial landscape have accelerated innovation and growth for fintech solutions and products. This has been supported by the Indian Government’s incentivised support for digital payment and changes in law which once burdened fintechs, and which have now been altered so banks and fintech lenders are able to produce the most cost-effective consumer acquisition strategies.



Banks and fintechs have now created a collaborative model of leveraging their respective strengths to provide consumers with the best possible outcome. According to research, even though data regulation protections and regulatory framework need to be in place as digital transactions accelerate in the country, banks are beginning to rely on fintech lenders for alternative credit scoring procedures and ultimately moving towards adopting alternative payment solutions.



Local banks are expected to further align their technology adoption methodologies to take advantage of the digital optimization of processes and policies. Building safe and easy onboarding processes, adopting the optimal technologies and ensuring highest standards of data privacy will drive the next wave of innovation and empowerment at the Banks.



Original article was published in The Economic Times.