The Indian payment sector is seeing numerous significant advancements, from introducing new payment methods to modernising outdated ideas. One such payment option that is now becoming very popular is Buy Now Pay Later (BNPL). It is quickly establishing itself as a very practical payment choice, effectively lowering the financial strain of a borrower by providing cost-free EMIs.
Let's look more closely at the idea behind "Buy Now, Pay Later," the factors fueling its expansion, the advantages it provides to consumers and businesses, and the leading participants in the payment industry.
Did you know? At the current rate, BNPL in India is valued at roughly USD 3-3.5 billion, and by the end of FY 2026, it is anticipated to reach USD 50 billion
What is BNPL?
The idea behind BNPL is really straightforward. It's a modern financial business that enables customers to purchase a good or service and repay it in one or more payments down the road.
Frequently, these purchases are interest-free. Nevertheless, in the event of a late or non-payment, a fee may be assessed(s). This choice is most suited for young, unaccustomed to credit, cash-strapped people without credit cards. However, anyone and everyone can utilise this method of payment.
The short-term financing option is particularly gaining favour with the general public as it allows people to purchase goods with greater ticket sizes, making them more accessible as purchasing options.
For instance, a DSLR typically costs ₹50,000 and is a high-end item that not everyone can buy. A consumer can immediately utilise the DSLR by breaking up the total purchase price into manageable, interest-free payments with BNPL. The ultimate goal of BNPL is to increase convenience for customers with high goals but limited financial resources.
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How Does BNPL Work?
There are a variety of different BNPL schemes. Although each business differs in its terms and conditions, point-of-sale instalment loans typically work in the manner described below:
- You choose the buy now, pay later option at the checkout when making a purchase at a merchant.
- You pay a low down payment, such as 25% of the total purchase price, if accepted (you are informed in a matter of seconds).
- The remaining balance is then paid in a number of interest-free instalments.
- Payments can be made by cheque or bank transfer; they can also be automatically debited from your debit card, bank account, or credit card.
BNPL vs Credit Card
Even though they both require postponed payments, BNPL differs from using a credit card to make a transaction. You are only bound to pay the minimum monthly amount due on your credit card when you use it to make purchases. Until you pay off the balance in full, interest will be charged on the outstanding balance (unless you have a card with a 0% introductory APR). However, a balance can be carried indefinitely.
In contrast, BNPL agreements frequently don't levy any fees or interest. However, they have a set repayment schedule that is usually a few weeks or months long. Each time, the cost is disclosed upfront, and it is typically the same sum. It is similar to any other unsecured personal loan or credit card.
The Three Parties in a BNPL Transaction
A BNPL transaction involves a customer, a merchant, and a financial services provider as the three parties (usually a fintech).
Consumer
A customer would typically use a credit card (if they had one) or a debit card to pay at the register. With BNPL, they may make a very little down payment—or even none—and spread out the remaining balance over several weeks or months.
For consumers who may not have other means of payment—perhaps because they lack credit history, preventing them from obtaining a credit card, BNPL is an intriguing and alluring option to get credit.
The BNPL supplier gives consumers speedy loan approvals so they may concentrate on the shopping experience. Due to weak consumer laws for BNPL transactions, the upfront user experience is frequently more effective than applying for traditional credit from a lender. Customers, for instance, are not obliged to provide the BNPL provider with a lot of information. Apart from the fact that there is financial incentive for using technology, BNPL loans has come up with no interest loan for its client.
Merchant
The average ticket price for consumers is something that retailers are always trying to raise. Furthermore, "abandoned" shopping carts—which occur when a customer decides not to complete a purchase—are a common problem for e-Commerce firms in particular. When retailers provide BNPL, customers seem to finish a transaction more often and for more significant amounts. Thus there’s a business reason for shops to embrace this choice.
The merchant must independently assess the credit risk and administrative costs when providing credit at the point of sale. This is significantly less attractive than providing their customer with this option in exchange for a fee to a BNPL partner.
The fact that retailers already give up margin to payment processors for credit card transactions makes it an attractive value proposition to switch fees from one financial services company to another (in exchange for a perhaps higher average ticket price). To put it another way, by offering this financing option, businesses subsidise their customers in return for increased sales and higher-value transactions.
Also Read: Digital Payment Methods - Types & Benefits of Different Digital Payment Methods
BNPL Providers
In a BNPL trade, the financial services provider (lender) compensates the merchant when the transaction occurs. The lender then assumes responsibility for extending credit to the consumer and issuing invoices to the consumer throughout the period of the BNPL term.
As a payment service and a lender, BNPL companies take on the responsibility of non-repayment from the customer. They give retailers a discounted portion of the whole purchase price as compensation for the risks. The client then makes instalments to the lender at a value equivalent to the purchase price.
High-tech businesses with high costs to expand their system and network are usually the BNPL providers. They must give merchants and consumers strong incentives to choose their services over their rivals. Most cite “proprietary” models in order to underwrite unsecured credit risk for consumers and do not disclose the approval criteria
Advantages of BNPL Services
For Customers
1. Flexible Ways for Repayment
A flexible repayment mechanism has formed the foundation for the entire BNPL notion. Purchasing doesn't require paying the complete sum at once. At checkout, they can just select BNPL as their repayment option to divide the total cost of their order into manageable EMI payments.
2. Zero Processing Charges
BNPL services have completely eliminated the processing fee associated with traditional credit systems. The payment method is far more affordable and convenient than its competitors.
3. No Additional Fees
BNPL payment options often don't involve any extra fees or costs. From the very start, everything is revealed wide and clear to the customer. As a result, customers may make wise selections. However, if a customer misses the deadline for payment, interest will be added.
4. No Documentation Is Necessary
The fact that BNPL demands no paperwork makes it a very accessible choice. To use the service, customers do not need to reveal their monthly salary or have good credit. For using BNPL as a payment option, just sign up with a Buy Now Pay Later service provider and complete a quick KYC check.
For Merchant
1. Higher rate of conversion
About 69.82% of online buyers abandoned their carts in 2021, according to Baymard. While there are many reasons, a customer can leave a website without making a purchase, roughly 7% of customers do it due to a lack of suitable payment choices or a financial emergency. Here, BNPL aids retailers in enabling customers to purchase goods of their choice under either of the stated conditions. Additionally, it enables customers to use BNPL as payment and benefit from continuing sales and special discounts on a merchant's website.
2. A larger audience
With the aid of BNPL, retailers can significantly lower the cost of making large purchases for customers by breaking the whole amount up into smaller monthly payments. When using the BNPL payment method at several merchant locations, including online and physical retailers, a customer can now plan to purchase an iPhone 13 Pro valued at ₹1,19,000 without second-guessing their decision.
3. Increased client satisfaction
High retail conversion rates are correlated with satisfied customers, and giving customers autonomy over their purchases makes them happier. Merchants encourage customers by providing them with this flexibility and range of payment alternatives, which leads to positive customer feedback and a greater conversion rate.
Also Read: Government Testing ‘UPI Lite’ for Payments without Internet
Disadvantages of BNPL Services
For Customer
1. Impulsive spending and buying
Impulsive buying and overspending are two of the main drawbacks of BNPL. Customers now have the power to break down hefty payments into manageable EMIs, relieving some of the immediate financial strain. They also become consumed by the urge to spend money on things they don't want, and they can develop a shopping addiction and spend greater than they can bear.
2. Delayed payments fines and interest fees
While most Buy Now, Pay Later service providers give their clients interest-free services, they charge fees for late or missing payments and for inadequate cash. Until a customer seems to have enough funds in their account to fulfil the planned payment, a late fee is often imposed daily.
3. Potential for a Low Credit Score
While BNPL doesn't aid in the development of a customer's credit score, a missed or late transaction will undoubtedly have an impact. Every missed payment is registered to the credit agency, and the user's credit history is then updated.
For Merchant
1. Increasing merchant fees
Currently, most BNPL service providers active in the Indian market charge clients and merchants a small fee for every transaction. Nevertheless, the costs associated with BNPL are significant compared to conventional payment methods, and they often fall between 2% and 6% of the entire acquisition cost.
2. Integration Issues
There are some workarounds involved in integrating BNPL as a payment option. Most of the time, it necessitates specialised equipment and technology, which frequently raises the cost borne by the retailer. Numerous financial experts advise choosing third-party BNPL service providers because they offer retailers many other payment choices and function as a less expensive alternative.
3. Boosts Consumer Debt
The fact that BNPL frequently encourages people to purchase more goods than they can manage is another disadvantage. This can put customers in danger, harm their credit scores if they miss or make late payments, and ultimately cost retailers money.
Also Read: Virtual Payment Address (VPA)– A new mode of payment
Conclusion:
The concept behind buy now, pay later is that consumers may instantly obtain the products they need while simultaneously receiving a little additional time to pay for them.
In India, the BNPL payment industry may still be in its infancy, and it is predicted to become the next big thing, overturning the whole payment sector. NBFCs are developing modern BNPL products and an expanding number of Fintech companies to meet the rising demand for cash-crunch management among Indian consumers. Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.
