‘Buy Now, Pay Later’ Gains Currency In Pandemic Times

Buy now. Pay later. What’s not to like? Particularly when incomes may have taken a hit, credit card limits may have been cut and traditional lenders may not be giving out personal loans as easily as they once did.

As legacy lenders turn risk-averse amid a weak economy, a segment of digital lenders is powering ahead luring consumers with the promise of ‘buy now, pay later’, or BNPL as it has come to be known.

While no formal industry-wide data exists on this segment of credit, conversations with those who offer and process such credit suggest the trend is gaining traction.

Pine Labs is a company that processes ‘buy now, pay later’ payments from a host of lenders. Its payment terminals reported Rs 1,700 crore worth of sales through pay later options, just in the month of October. Total spends on Pine Labs’ terminals stood at Rs 12,900 crore during this period. In the July-September quarter, the company saw a 49% increase in consumer durable purchases through the pay later option across its terminals, Pine Labs said in its statement.

While transaction levels have been impacted by the Covid-19 crisis and now the festive season, “the general feeling we're getting from merchants is that people are preferring to buy things on pay later options”, said Byas Nambisan, chief executive officer of Ezetap, which, like Pine Labs, also processes BNPL transactions, among others. “Even brands selling these products could be using the pay later scheme to push out old stock, before launching something new. This goes beyond the festive season trends.”

Lizzie Chapman, co-founder and chief executive officer of digital lender ZestMoney, said applications for pay later products have gone up by 2-3 times from a year ago, showing that customers are preferring such transactions.

BNPL vs Credit Cards

While the ‘buy now, pay later' product may strategically avoid the word ‘loan’ or ‘credit’, it is an IOU in a different guise. Where it may differ from more traditional forms of credit is that the interest cost of that credit may, in some cases, be subsidised via arrangements with the seller of goods and services.

“Most brands have a marketing budget, which they use to offer discounts to customers during the festival season. Under the pay later option, that marketing budget can be used instead to subsidise interest on the EMIs and we see that the demand for the products increases because customers are getting it at zero interest cost,” said Kush Mehra, the chief business officer at Pine Labs.

Why not just offer this subsidy as an upfront discount to customers purchasing goods via credit or debit cards?

Anil Pinapala, chief executive of Vivifi, a non-bank lender which runs a BNPL product called FlexPay, said the difference lies in the kind of customers being targeted and the flexibility they may get in repayments.

“In our case, we have actively gone out looking for customers in the low-income groups because they do not have the income range where a bank can offer a credit card. We also offer complete flexibility for customers on the period and amount of repayments because their income is often unstable,” Pinapala said. Nearly 25-30% of Vivifi’s transactions come via FlexPay and the company hopes to raise this share to 50%.

Nityanand Sharma, chief executive officer of Simpl, believes the BNPL product is actually more transparent since the costs and benefits are apparent upfront. This is in contrast to credit cards, where varying interest costs may be charged based on a customer’s previous track record.

“This is a 70-year-old business model and the modern borrower feels that it is low on transparency, with a lot of hidden charges. Younger customers would much rather prefer a pay later product, which informs them exactly how much they owe and when they need to pay back,” Sharma said.

Simpl offers credit lines as low as Rs 2,500-3,000 to customers. The company does not charge you any interest, but the borrower must pay back their dues within 15 days, else they face the risk of not being able to access Simpl’s financing option. Customers are offered the credit line at zero percent interest, while each merchant pays 1.5% annually to Simpl, Sharma said.

“We don’t report to credit bureaus because the dues are too small, but we select customers through a process based on trust, just like the Kirana store. We find that most customers do not pay because the amount is too small to register as due, but when you remind them, they settle immediately,” Sharma said.

What Default Rates Look Like

There are no official statistics for default rates on BNPL products.

ZestMoney pegs its default rate at under 5%.

Vivifi, and by extension Flexpay, estimates its default rate at 4-6% due to difficulties in collections during the pandemic and its below-prime and low-income borrower base. However, the lender is still well placed to control the situation, Pinapala said.

Simpl claims to have seen an improvement in the default rate during the pandemic. According to Sharma, the default rate has fallen to 0.65% from 0.95% pre-pandemic.

BloombergQuint could not independently verify these statistics.

“One would have to take the default rates at face value, because there is no quarterly reporting mechanism for these lenders. But considering the trends in the industry, the median average default rate should be above 10%,” according to Parijat Garg, a digital lending expert.

A hint of rising defaults came this summer when reports of unhealthy recovery practices prompted the banking regulator to step in. In June, Reserve Bank of India released a set of guidelines for digital lenders, where it urged them to practice transparent lending and recovery measures. The central bank had also asked digital lenders to exercise control over third party agents who might be harassing customers or misusing their personal data.

A Loan By Another Name

The pay later product, while being a loan in its essence, is always marketed as a convenient payment option. The providers of such products also target younger customers who may not have adequate experience in using credit products.

According to Garg, customer education around credit involved is very important to ensure that the pay later adoption multiplies without any hiccups.

“Currently, educating the customer about the pitfalls of unsecured credit is lagging for these digital lenders, which they must address to ensure that people do not fall into debt traps. But once you take care of that, the BNPL products can truly transform access to credit in India and play a crucial role in inclusion,” Garg said.

Navin Chandani, CEO of credit bureau CRIF Highmark, agreed. “The pay later products can offer the answer to lending to younger new to credit customers. Of course, financial education and discipline are key in all of this,” Chandani says.

Individual lenders though reject the idea that the customer is intentionally underinformed or misled.

“We are not interested in an uninformed customer. Our borrowers are always clearly informed about the amount they have used, the duration of repayment, the charges they will attract for delays and that their credit scores could get impacted,” said Chapman of ZestMoney.

Chapman agreed that there are companies in the market who do not use the word loan or credit when marketing products. This, according to her, could lead to misinformation. “But this is why there are industry bodies such as the Digital Lenders Association of India, which ensure that lenders follow a code of conduct,” she said.

Rajnish Kumar, former chairman of State Bank of India, said that young people must be encouraged to use credit, but they must also be taught discipline.

“It is the only way to finance important purchases in your life, like a house or a two-wheeler or even certain consumer durables like a washing machine or refrigerator. We are at a stage in time where if you wait to save money and buy these things, you are always going to fall short,” Kumar said.

But at the end of the month, if a customer is sitting on a large credit card bill or expensive borrowing from a fintech funding everyday expenses, then that is just foolish behaviour, he said.