How the buy-now-pay-later model is changing consumer shopping habits in India

Piyush Rautela, a Delhi-based public relations executive, is increasingly taking advantage of the plethora of “buy-now-pay-later” interest-free options that are available for a number of online spends – from paying for cabs and shopping on Amazon to paying his utility bills.

He spends about 10,000 rupees ($130) to 15,000 rupees a month on online transactions.

“At the end of the month, I can track all my expenses,” he says. “It improves personal cashflow at no additional cost.”

It is a booming market. The growth of e-commerce and low prevalence of credit cards in India are leading to an expanding buy-now-pay-later industry in the country, as it gives a lot of people the option to access credit for the first time.

The service is offered by companies including Amazon and home-grown rival Flipkart, ride-hailing app Ola and several FinTech firms in the country.

“The potential for buy now, pay later’s growth is tremendous in India,” says Adhil Shetty, chief executive and co-founder of BankBazaar.com, an online marketplace for financial products. “The market is only just getting started.”

Buy-now-pay-later – or BNPL – services, which are growing in popularity globally, give consumers access to credit that is made instantly available. Analysts say this is both a boon and a risk.

The credit is often interest-free for a limited period and can be paid off in instalments, but companies typically charge relatively high penalties if payments are not made by specified dates. They make money on these fees and through merchant commissions.

The segment is projected to expand rapidly in India within the next four years, reaching up to $50 billion by 2026 compared to around $3bn-$3.5bn currently, according to RedSeer Consulting data.

BNPL will be the fastest growing payment method for e-commerce in India, set to increase from 3 per cent last year to 9 per cent of the market by 2024, the latest Global Payments Report by Worldpay from FIS forecasts.

A rise in the use of these services is largely being driven by the growth of online shopping and digital transactions, which accelerated during the Covid-19 pandemic.

India's e-commerce market is projected to end 2021 up 17 per cent to reach 4.5 trillion rupees ($59bn) and to almost double to 8.8 trillion rupees in 2025, according to GlobalData.

Low credit card penetration and five credit cards per 100 individuals is spurring growth in the country, according to GlobalData.

This makes BNPL offerings an attractive alternative credit option at a time when many people are tightening their purse strings in a country with a large, tech-savvy, young population.

BNPL model “could possibly challenge the existing credit models for online purchases in the long-run”, says Ravi Sharma, lead banking and payments analyst at GlobalData.

Private banks have followed FinTech firms and e-commerce companies and started offering BNPL options.

The value of loans on offer typically range from 2,000 rupees to 100,000 rupees, according to research by BankBazaar.com.

“The conditions created by the pandemic hastened the adoption rates” of BNPL between 2020 and 2021, Mr Shetty says.

“Consumers whose incomes had been squeezed wanted greater flexibility with their payments. Buy now, pay later provided that option because it could be availed easily, even by new-to-credit borrowers with no credit histories,” he explains.

“Secondly, locked in their homes, people had to go online for all their shopping and e-commerce websites and apps started providing an option.”

Indian digital payments company MobiKwik started offering BNPL services in May 2019 before the pandemic hit.

The initial public offering-bound MobiKwik, which picked up $20 million in funding from the Abu Dhabi Investment Authority in June, has experienced tremendous growth. The Gurugram-based company says it now has 22.3 million BNPL users and is handling 4 million transactions in this space per month, offering credit between $50 and $500.

“The average profile of the user is ages 23 to 38, and 65 per cent male,” says Upasana Taku, co-founder and chief operating officer of MobiKwik. “For us, capturing this young, millennial Indian who is digital-savvy early on is very important because it leads to loyalty, once we offer them credit when no one else is willing to.”

The business “is absolutely profitable” for the company, she adds.

The growth of the market is also being driven by a plethora of FinTech companies, analysts say, which are coming up with innovative products in the segment to tap the opportunity.

“Until very recently, credit products in India were limited to the loans like car loans, home loans and personal loans and there was only one type of product on the credit line, which was a credit card,” says Nitin Gupta, founder of PayU.

This year, Mr Gupta launched a new FinTech start-up called Uni, a FinTech firm backed by investment from Lightspeed Ventures and Accel India, which aims to bring a range of new credit products to Indian consumers.

Many people borrow money from family and friends and “it dawned upon us that once in a while, for most users, there is a short liquidity crisis”, Mr Gupta says.

This prompted Uni to launch Pay 1/3rd, which is a pay-later card, powered by Visa. The product automatically splits transactions into three instalments to be paid over three months with no interest charged. As an incentive, users receive 1 per cent cashback if they pay back the full amount in the first month itself.

The company plans to start charging a joining fee for the card next year. But as is the case with many BNPL services, customers are charged a steep penalty if they miss payments. For instance, if an outstanding of 1,000 rupees is missed with Pay 1/3rd, the consumer is charged a late fee of 200 rupees.

However, this is not deterring consumers. The company says it is registering monthly disbursals of 1.75 billion rupees ($22.9 million).

“India’s BNPL space has proven to be lucrative for investors where the opportunity for credit expansion is massive and there are companies built to capture this opportunity in the next decade,” Mr Gupta says.

Eager not to miss out on a booming market, online loan platform LoanTap in August launched a credit line backed pre-paid card which offers access to BNPL options.

“Buy now, pay later was initially most popular among millennials and young professionals but with the popularity of online shopping and people staying at home during the pandemic, many people in the parents and grandparents generation have also started using buy now, pay later or similar schemes,” says Satyam Kumar, chief executive and co-founder of LoanTap.

The Pune-based company has also tied up with small “mom-and-pop” grocery shops in India, known as kirana stores, to allow them to service their customers using this credit option.

But with the rapid growth of the BNPL industry, there are concerns that this could lead to high levels of indebtedness among some consumers and defaults, which would impact businesses.

“One of the big challenges all lenders face in India is managing asset quality,” says Mr Shetty of BankBazaar.com. “We’re in a phase of high non-performing assets (NPAs) in the Indian banking system.”

Unlike credit cards and other forms of loans, BNPL transactions are often approved within minutes online with little documentation required.

“You could be new-to-credit but you could still get a BNPL,” Mr Shetty explains. “For any lending segment, it is important that asset quality remains good and NPAs remain under control.”

Ms Taku says MobiKwik is able to mitigate these risks because it has access to its user base and their data from its payments business. That enables the platform to assess the users’ creditworthiness and it only offers higher amounts to those who have already demonstrated “good behaviour” on repayments.

But she admits that default rates have risen during the pandemic, from 1.9 per cent for the financial year to the end of March 2020 to 5 per cent as of March 2021. This number is now easing as the economic environment has improved, she adds.

Industry insiders say that regulations will have to keep up with the sector’s evolution.

“If competition intensifies then it may lead to irresponsible behaviour by some players,” says Mr Gupta. “Credit has to be handled very responsibly. Given to the right customers and adhering to all regulations in place. Irresponsible behaviour by a single player affects the entire ecosystem.”