Popularity Of ‘Buy Now, Pay Later’ Creates A Blind Spot In Lending
“Buy now, pay later” products, which allow consumers to defer payment on goods and services without signing up for a traditional loan, are creating a blind spot for the credit market. This, as data on such products isn’t reported fully to credit bureaus, leading to concerns about loan stacking.
No official data is available on the extent of “Buy now, pay later” credit in the market but anecdotal evidence points to its increased popularity, BloombergQuint reported in November. As legacy lenders turned risk-averse amid a weak economy, digital lenders powered ahead luring consumers with the promise of “Buy now, pay later”, or BNPL as it has come to be known.
But unlike banks and financial institutions that are governed by the Reserve Bank of India, some online BNPL apps don’t consider themselves as lenders and don’t share complete data with credit bureaus.
When contacted, CRIF and TransUnion CIBIL told BloombergQuint that all banks, non-banking financial companies and other credit companies registered with RBI share their data with bureaus.
“If the ‘buy now, pay later’ firm is an NBFC or if it has partnered with a credit institution for providing credit facility to the consumers, then the member credit institution will report data on this account to us,” said a CIBIL spokesperson.
Manu Sehgal, business development head for emerging markets at credit scoring agency Equifax, said while he couldn’t confirm the extent of the data shared, there was regular data being shared by PayU India, while Simpl didn’t share any data and ePayLater shared data till November 2019. Presently, only LazyPay’s parent firm PayU India has an NBFC license from RBI, which it had secured in 2018. Further, ePayLater has restricted its services due to the ongoing pandemic and not restored the app yet.
Within LazyPay, a former senior executive told BloombergQuint on the condition of anonymity, that the business is divided into two categories. For the pure-play BNPL option for small-ticket online shopping credit, credit data is not shared with bureaus. However, for the LazyPay credit option, that offers up to Rs 1 lakh loan with flexible instalments to customers, data is shared with credit bureaus.
A spokesperson for LazyPay declined to comment.
BNPL: Is It A Loan?
The pay later product, while being a loan in its essence, is marketed as an open-invoice that a customer creates with online merchants, as a convenient payment option.
“We don’t consider ourselves a lending app, we are very much like a digital ‘khata’ (or tab),” said Nityanand Sharma, chief executive officer of Simpl. “One of the reasons why we do not share data with credit rating agencies is because our customer does not want to take a traditional loan for something so small.”
Imagine if you’re taking a Rs 500 loan like a khata but it is appearing on your credit information, then a traditional lender will question your borrowing pattern as to why you’re taking a Rs 500 loan. While the reality is that you aren’t even taking a Rs 500 loan, you’re just buying monthly supplies and settling it in 15 days in one go. So it’s almost like, if your post-paid mobile bill was considered a loan.Nityanand Sharma, CEO, Simpl
“One key difference between Simpl and other creditors is the loan amount is very low, there is no interest charged and the repayment timeline is also very short,” he said.
However, Kuntal Sur, partner & leader - finance risk and regulation at PwC India, disagrees. “Such loan products are in complete violation of RBI norms because no matter how they market it, it’s a lending product, but one that doesn’t follow any RBI norms,” he said. This may also lead to a debt trap for unsuspecting customers who may over-leverage themselves by stacking loans from multiple such apps without any implications on their credit score, he said.
Most BNPL apps charge a penalty if the customer does not repay dues at the end of 15 days. While Simpl charges up to Rs 250 for late payments, ePayLater charges a flat 3% per month and LazyPay also charges Rs 10 per day for non-payment capped at 30% of the total bill. If the customer still does not repay after 45-90 days, their account is blocked from the app.
“Lending by many online BNPL apps is like a black hole in the lending landscape,” said Parijat Garg, an independent credit-scoring consultant and a former executive at CRIF High Mark, one of the four credit information agencies approved by the Reserve Bank of India. This is because these online apps only pass on selective to no information on their borrowers to credit bureaus, keeping themselves and other lenders in the ecosystem, completely unaware of their customer’s creditworthiness, he said.
While BNPL transactions through online apps do not currently form a sizeable chunk of credit compared to the overall personal loan market in the country, as their share increases, the black hole widens too, Garg said.
Simpl claims to have over 7 million users and has processed more than 49 million transactions since its inception in 2015. LazyPay, on the other hand, claims to have over 2 million users and processes over 2 million transactions every month. The data on ePayLater’s user base was not readily available on its website.
BloombergQuint couldn’t independently verify their claims as there is no formal industry-wide data on this segment of credit.
The model also has risks for online merchants as most BNPL apps have minimal KYC norms. The makes it susceptible to loan frauds, said Sur. “If a person takes multiple loans from these apps and then goes absconding, the loan becomes difficult to track, doesn’t even affect that person’s credit history and eventually has to be, in most cases, written off as a bad loan.”
But Sharma says that Simpl uses other means, for instance, the past transaction history of their users to judge creditworthiness.
“We get a customer’s credit information in a different way,” he said. “We look at how much a customer spends on online platforms, and say if a customer is making regular purchases, we get the insight that their income, and it does not matter how much loans they have, can support a certain amount of purchases.”
Further, the app starts a customer with a credit line of Rs 1,500, but increases it gradually to up to Rs 20,000 based on their repayment history, the amount of KYC details they provide and their purchase history on the app. “If you repay regularly, your credit limit is gradually enhanced just the way it works for any credit bureau.”