Navigating the Risks of BNPL Services: Insights for Consumers

Financial technology has changed the way firms market and sell goods and services. The integration of embedded finance has emerged as a critical strategy for transforming business structures and customer experiences. This growing demand for integrated financial solutions, such as buy now, pay later (BNPL) options, is not just a trend but a meaningful change in how businesses across many industries operate and engage with their customers.

 

How do the BNPL offerings work?

 

Buy Now Pay Later, or BNPL, is a payment method that allows you to make a purchase without having to pay the full amount at once. Buy-now, pay-later (BNPL) loans are a type of installment loan.

 

It divides your purchase into multiple equal installments, the first of which is due upon checkout. The remaining payments will be charged to your debit, credit card, or bank account until you finish the transaction.

 

In the world of consumer finance, Buy Now, Pay Later (BNPL) services have arisen as a disruptive force, providing a simple and flexible method to buy. These services enable customers to extend the cost of their purchases over time, usually without incurring interest fees. This has made BNPL a popular choice for internet buyers, particularly young people.

 

With BNPL, you can make a purchase at a participating shop and select buy now, pay later at the checkout. If authorized, you pay a small down payment, such as 25% of the total purchase price. You then repay the remaining balance in a series of interest-free installments, usually over a few weeks or months.

 

Buy now, pay later (BNPL) programmes vary in terms and circumstances, but they often provide short-term loans with fixed payments and no interest. You can make the transaction with a BNPL app or with your credit card.

 

Factors Influencing BPNL Services

 

Overcoming the Credit Gap with BNPL as an Accessible Alternative. Traditional credit options, such as credit cards, are still out of reach for many young Indians due to a lack of credit history or stringent eligibility restrictions. BNPL challenges this paradigm by offering a more accessible and user-friendly alternative. With minimal documentation and quick approvals, BNPL allows previously excluded individuals to enter the credit sector, enhancing their purchasing power and driving market growth.

 

The Indian BNPL market is seeing tremendous expansion, expected to reach $100 billion by 2025, driven by numerous factors:

 

1. Tech-savvy Millennial Mania

 

India's younger, smartphone-wielding generations are propelling the BNPL revolution. The convenience of BNPL appeals to millennials and Generation Z, who are used to digital transactions and rapid gratification. Gone are the days of long credit card applications and large down payments; BNPL allows them to conveniently split their purchases into bite-sized installments, all through their trusted smartphone apps. This simplicity of use and control over funds resonates strongly with these tech-savvy customers, who form the core user base that drives the market's rapid growth.

 

2. Aspiring Affluence and Rising Incomes

 

As India's disposable income rises, so does the desire for a greater standard of living. Consumers, particularly those in the middle class, crave the latest electronics, trendy clothing, and comfy home furnishings. However, standard financing alternatives may appear onerous or unavailable. BNPL steps in as the perfect bridge, allowing them to fulfill their desires without straining their immediate finances. By splitting the cost of larger purchases into manageable installments, BNPL empowers consumers to upgrade their lifestyles without compromising their budgets.

 

3. Overcoming the Credit Gap

 

BNPL as an Accessible Alternative. Traditional credit options, such as credit cards, remain out of reach for a large number of young Indians due to a lack of credit history or onerous eligibility requirements. BNPL breaks this paradigm by providing a more accessible and user-friendly option. With minimum documentation and rapid approvals, BNPL enables previously excluded individuals to join in the credit sector, increasing their purchasing power and driving market expansion.

 

Future of BPNL in India

 

The BNPL market in India is thriving and this rise can simply be attributed to several factors such as low credit card usage in the country, inclination towards digital payments, rapid increase in the number of fintech companies ready to disrupt the traditional methods of accessing credit, etc. Because of its simplicity and ease of access to credit, BNPL has become one of the most popular products among Generation Z clients, young millennials, and first-time credit borrowers, who are typically overlooked by traditional banks.

 

According to The Covid Era of Rising Fintech, a report published by RazorPay, the Indian BNPL market would witness a rise by more than 637% in 2021, up from 569% in 2020. According to the Indian consultancy Redseer, the BNPL market would

 

In India, BNPL players include LazyPay, ZestMoney, Paytm Postpaid, MobiKwik, Flipkart Pay Later, Amazon Pay Later, and Capital Float. Traditional banks have also joined the BNPL bandwagon. This includes ICICI Bank's PayLater and HDFC Bank's FlexiPay. Axis Bank also purchased Freecharge from Snapdeal, an e-commerce startup.

 

The Buy Now Pay Later (BNPL) market will be worth $309.2 billion in 2023 and is predicted to develop at a compound annual growth rate (CAGR) of 25.5% during the forecast period. Online payments are fast increasing as more consumers take advantage of online buying, which benefits BNPL market growth.

 

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Challenges Faced by BPNL

 

As with any type of payment or credit, BNPL carries risks that must be addressed. We'll look at the most typically reported challenges.

 

The risk of debt spirals across many BNPL providers. The key problem for BNPL companies may be to protect customers from usage across numerous suppliers, whether intentional or unintentional. Because these services are freely accessible and providers are now unable to share data with one another via credit reference agencies (CRAs), there is a high risk of customers incurring unmanageable debt. As highlighted in the Woolard Review, there is also a perception that “some consumers don’t view BNPL as credit” owing to the “zero cost” nature (among other things), creating a risk that consumers might not apply the same level of scrutiny as they do on traditional forms of credit.

 

However, as BNPL adoption and usage grow and reach larger individual transactions, average balances and the costs borne by customers (such as late payment fees) may increase. There is a long tail of at-risk users. For example, 6% of our survey respondents had an open balance with three or more providers, and 10% stated that one of their top three reasons for using BNPL was that they had reached their credit card limit.

 

There is a risk of default and missed payments. We polled BNPL and credit card customers about their expectations and frequency of missed payments. 41% of BNPL customers strongly or somewhat agreed with the statement "I am concerned about skipping payments on my BNPL purchase," but just 30% agreed with the same statement concerning credit cards. While this is unsurprising considering that credit cards have significantly lower monthly minimum payments, it does indicate a significant level of repayment anxiety among BNPL users.

 

To sum up, In terms of the overall share of late fees to total income, it is still substantial for some BNPL suppliers but has been continuously falling. (The largest supplier, Klarna, does not impose late fees to UK consumers, and PayPal will eliminate late fees on new purchases starting October 1, 2021.) Our poll revealed that 52% of BNPL users (excluding Klarna) who missed a payment were charged a late fee, compared to 62% of credit card users.

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