By Karan Shelke, Advocate at Lex Credence on April 17, 2024
Introduction:
A couple of months ago, I was searching online for mobile phones. What followed after a voluminous search was the barrage of emails of buy now, pay later (hereinafter referred to as “BNPL”) schemes. With 0% interest, flexible EMI options and little documentation looked very promising. What stopped me from availing these services was my favorite acronym – “there ain’t no such thing as a free lunch”. This acronym has stood the test of time and continues to do so against the onslaught of social media and other free online services.
In today’s world, consumers are spoilt for payment choices for purchasing goods online. Is your gas bill lying unpaid? Or maybe your holiday plan is over your salary slips? Worry not. BNPL companies are ready to finance your appetite. Online platforms have tied up with third-party fintech players is the latest addition to a variety of payment mechanisms. These third-party fintech players allow consumers to make interest-free instalment payment for purchase over the course of several weeks or months.
For a country that has a history of low credit penetration in semi-rural or rural parts, BNPL has the potential to bridge the gap between aspiration and affordability. The BNPL sector grew 637% in 2021, as compared to the 569% growth observed in 2020. Naturally, this has attracted a huge influx of private equity capital into the sector forcing BNPL platforms to aggressively increase their portfolios. At this rate, BNPL is on its way to disrupting traditional credit markets.
Risks Associates with BNPL
According to one of the co-founders of the BNPL platform, the target audience is a large population in the market who have zero credit bureau footprint. Easy consumer credit can arguably have a domino effect on increased demand which can trickle down to increased income and employment at the macroeconomic level. However, any widespread rise in delinquencies due to subprime lending is an invitation to economic uncertainties.
There can be several other risks associated with the new-to-credit population. The consultation on the regulation of BNPL has noted consumer harms like the improper advertisement of BNPL, lack of affordability assessments, poor understanding of the product and BNPL’s treatment of borrowers. Studies suggest that BNPL clients have a higher online motivation purchasing aim than those who do not utilize BNPL. Research specific to India is limited. Studies across emerging economies can provide an understanding of the effect of consumer credit on economic metrics. A recent study on the Brazilian Government’s program of conducting a heavily advertised credit expansion indicates the negative impact of utilizing household credit for stimulating the economy.
Concerns over BNPL have been raised in various jurisdictions due to the lack of regulatory frameworks. As of October 2021, Britishers owe more than $5.49 billion for BNPL services. According to a study, 34% of those who have used BNPL services in the US, have fallen behind on one or more payments. BNPL platforms state that they have their machine learning based on previous buys and e-payments history to gauge the creditworthiness of a borrower. However, these may be very narrow parameters to assess the creditworthiness of a borrower. Further, there is also a lack of clarity on borrowers with multiple BNPL loans and interoperability of data on such borrowers between BNPL platforms in India.
BNPL and Sustainability
The classic preaching has been to cut one’s coat according to one’s cloth. According to research, more than half (57%) of the clients of users say they have regretted purchasing through BNPL because the item was too expensive. BNPL companies may be able to create inclusive fintech and sustainable markets through strategic decision-making and promoting responsible lending. To quote Ban-Ki-Moon, “There is no Planet-B”. Increased consumerism fueled with easy credit can make things worse.
The Way Ahead
BNPL offers immediate gratification and convenience but it also carries the risk of leading consumer into overspending and accruing unmanageable debts. In India, the interest rate for using BNPL schemes can be anything between 10-30% based on the type of transactions and credit score. While traditional banks have been doing recovery and collection for a very long time, less experienced BNPL companies may deploy aggressive collection strategies resulting in consumer detriment. Increased competition in BNPL schemes may also lead to predatory lending and increased subprime lending. The BNPL market in India is a fast growing sector with significant consumer demand. However, there is a lot that still needs to pan out but only a long-term balanced approach of providing credit while avoiding over-indebtedness can help consumers and the earth.
Currently, no specific regulations is dedicated solely to BNPL services in India. To counter that, BNPL firms should continue to invest in risk management capabilities, including monitoring of customer repayment behavior without breaching data privacy laws in order to mitigate risks of defaults.
The article represents the personal views of the author.