Is Credit Credible?
“You’re purchasing stuff that you don’t need, with the money you don’t have.”
Imagine a world where you don't have to choose between your wants and needs. A world where you can have your cake and eat it too. A world where you can buy that Jordan pair you've had your eye on or that new gaming console you've been dreaming of without breaking the bank. It seems to be a paradise to live in, but wait, could a devil be lurking in a corner?
Consider a situation where you find the latest edition Jordans. You are keen to buy it, but you neither have enough bank balance nor a credit card. Subsequently, you search for an alternative payment method and use the BNPL feature. Through this, you pay a small down payment on the shoes and the remaining price in instalments.
The BNPL setup offers the superpower of easy credit with no (or minimal) paperwork and also often requires little to no credit checks. Thus, credit is now accessible to a wide range of consumers, including those with a poor or no credit history. Hence, using BNPL exposes them to numerous business prospects while granting them a luxurious lifestyle. Thus, regardless of their credit score, people can fulfil their desires of a rejuvenating vacation, branded shoes, or the latest iPhone.
Emergence of GENZ credit line
The credit card industry in India is limited to only 3% of the total population. Furthermore, Indian customers have always been hesitant and careful about obtaining any form of a credit line. The younger generation who are prepared to take the advantage of easy credit is not eligible for the same. This is due to stringent requirements, including an average salary of Rs. 1.44 lakhs, a solid credit score, and extensive paperwork.
The BNPL companies decided to fill this gap with the concept of micro-credit. These companies typically earn their profits from the interest charged and the penalty paid by their beneficiaries on account of deferred payments. Certain service providers such as Slice, ZestMoney, and Lazypay also charge retailers a small fee for allowing their customers to pay for their purchases using the feature. Furthermore, certain BNPL providers earn revenue through partnerships and collaborations, such as offering additional financial services or rewards programs.
The pioneer of this model in India was Paytm - a digital wallet and e-commerce platform. It was the first company to introduce BNPL through Paytm Postpaid services in 2016. Subsequently, PhonePe in 2018 and Zest Money in 2019 followed the trail.
The BNPL feature was marketed not as a form of a temporary loan but as a tool that allows its users to lead a good lifestyle at an affordable price. Owing to this perception among the public, experts predict that the BNPL industry will reach a market size of around $50 billion and a user base of around $90 million by 2026.
The tail or the tale ?
The ability to defer payment and dice it into smaller pieces does sound appealing. However, it also results in impulsive purchases that disbalance an individual’s budget. When repeated, the act becomes a habit, and the person ends up in a debt trap shouldering a high credit risk simultaneously.
According to the reports, 15% of people in Australia and 33% in America take out loans to pay off their purchases using BNPL. In India, experts have raised concerns about similar trends. As the market continues to grow, the potential effects of BNPL on consumer debt also increase.
Thus, it can be concluded that BNPL with just the right regulation pertaining to transparency and credit issuance can change the face of the planet. In India, RBI, while keeping up with the basic features of BNPL cards, has set guidelines that prevent non-banks from using credit lines to load their prepaid instruments; instead, they can only do so with cash, bank or credit card accounts.
Partnership with Technology
BNPL companies are increasingly using Artificial intelligence (AI) to improve their operations. Appealing features such as predictive analysis, automation, fraud detection, and credit scoring are all using AI. Additionally, AI is an effective tool for modifying the consumer experience. It provides tailored recommendations and offers based on the customer's browsing and purchasing history.
Slice, an Indian fin-tech start-up, has already started integrating AI and data sciences with its business model. The company aims to innovate and differentiate itself in the BNPL market by providing a seamless and user-friendly experience using technology. One such innovation includes the program that calculates the power of the consumer’s purchasing for each transaction based on their credit history (to ascertain whether to issue a credit or not). Slice also has launched a digital wallet feature, which allows customers to store money in a virtual wallet and use it to make purchases on the platform.
Is there a better alternative?
The BNPL model is in complete turmoil, thus the consumer is back to square one as to how to fund his lavish lifestyle. Why not go back to the old-school way of saving first?
To compete with the BNPL model, Multiple, an Indian company, has developed the Save Now Buy Later (SNBL) model. In this model, the consumers are offered a variety of savings and investment plans like investment portfolios and cashback rewards. These plans help consumers save money over time so they can afford to make larger purchases in the future. It also partners with retailers to offer deals and discounts to customers.
BNPL and SNBL are two different but equally functional solutions to the same problem, the dilemma of living a better lifestyle with limited income. BNPL can provide immediate access to goods but can promote overspending and lead to a debt trap. It becomes practical to prefer the model in situations where one wants to make relatively small ticket purchases like apparel, dine-out and in general shopping; given that one doesn’t overextend their budget. SNBL, on the other hand, promotes good financial habits of saving first, but it may take longer to make a purchase. Thus, SNBL should always be preferred in big-budget purchases like planning a vacation, so as to not make a big dent in one’s pocket.
The Final Verdict: Convenient or Concerning?
One cannot emphasise more on the fact that it is extremely crucial to not overextend your budget using the BNPL feature. It’s important to remember everything comes at a cost. Like with any form of credit, it's important to make sure that you can afford the payments and that you understand the total cost of the purchase, including any interest or fees. More consumption in the present only implies less consumption in the future and that’s something to think about!
Author : Sehaz Nagpal, Purav Tayal
Illustration By: Hardik Mukhija