Unleash the power of “buy now, pay later”

Attracting stakeholders – BNPL providers and consumers – by offering “integrated applications” will help scale up the model

By Vaibhav Agarwal, Vaibhav Goel and Anuj Kapoor

The Buy Now Pay Later (BNPL) model has been under scrutiny by the Reserve Bank of India (RBI) for some time, and finally, the RBI has taken steps to regulate BNPL services. In a nutshell, BNPL is a short-term financing option that allows users to buy a product now and pay in installments later. Major fintech players such as Slice, Jupiter, ZestMoney, and Lazypay have a large share of the Indian BNPL market, which is currently valued at $3-3.5 billion. It is expected to reach USD 4.5-50 billion by 2026.

Interestingly, not many banks have shown interest in this market, partly due to the risk-averse nature of our banking system. Nonetheless, a few private banks such as Axis and ICICI have started investing in BNPL products.

growth potential

Despite Indian banks’ cautious approach to BNPL, with rapidly increasing internet penetration and smartphone usage, India will soon become the most digitally savvy country in the world. This, combined with cheap mobile networks and advanced payment infrastructure, also creates potential for the growth of the BNPL market.

However, one of the most prominent factors driving the growth of the BNPL industry in India is its adoption by Gen-Z and millennials. This is mainly due to the low cost and transparency of BNPL’s structure, as well as its hassle-free credit approval scheme. Another contributing factor is the rapid growth of e-commerce penetration in second- and third-tier cities.
According to the Global Payments Report 2022, BNPL has captured a 3% market share in the country’s online e-commerce payments sector. The increase in online purchases in the wake of the Covid-19 pandemic has further fueled the growth of BNPL services in the country, as BNPL lenders help people secure interest-free EMIs and loans.

expand

One way to expand BNPL services and create engagement among stakeholders (ie BNPL providers and consumers) is to provide integrated solutions, ie “integrated applications”. Many US and Chinese players have adopted this integrated platform strategy, offering their users shopping, payment and financing options. Merchants are allowed to register on the “Super” app through which users can shop and fund purchases. This means combining the value provided by the seamless customer experience delivered through the app with ready financing to finance the purchase. A similar model can be implemented in India, unlocking the potential of BNPL services from this opportunity.

The integrated shopping model will make BNPL services part of the end-to-end customer experience. The app will not only provide customers with a one-stop service, but will also help service providers customize their offerings according to their needs. Advanced data mining tools will be able to collate data from customers’ buying patterns to gain further insight into their preferences. This information will also help BNPL service providers understand current market trends, enabling them to partner with new merchants.
Integrated shopping apps will add new revenue drivers from advertising and affiliate marketing. These new revenue drivers will enable BNPL Services to offer customers more discounts and incentive programs. Shopping from an integrated application will allow customers to purchase items from merchants that do not have integrated BNPL services at checkout. With everything integrated in one place, the cost of acquiring new customers will be greatly reduced. BNPL services can even charge higher service fees to merchants with increased brand influence, transforming them from payment-only services to generic brands.

Brand positioning can be further enhanced by partnering with celebrities and influencers. It will not only attract more customers to the platform but also bring merchants for various products. The enhanced brand image of integrated BNPL service providers will also help small merchants gain visibility for their products on the platform. Hence, the integrated shopping model could be a game-changer and redefine the future of the Indian BNPL market.

uncertain future

Although the Indian BNPL market currently has growth potential, the future does not appear to be clear. RBI in its report on ‘Digital Lending Including Lending Through Online Platforms and Mobile Apps’ has recommended that ‘BNPL be brought under Balance Sheet Lending (BSL) which should only allow banks and non-banks Finance Corporation (NBFC) and classifies BNPL as a credit product.” This is done because BNPL providers describe themselves as credit card alternatives rather than credit products. This enables them not to report their transactions with credit agencies.

The service provider further claimed that since no interest was charged to customers, they did not fall under the definition of credit. The RBI’s concern stems from the fact that these BNPL providers may continue to extend credit to those with poor credit histories. When customers stop paying, these companies will not fall under the jurisdiction of RBI’s collection code of practice as they have not recognized themselves as credit products. The Reserve Bank of India has made clear its stance on the need for regulatory approval for BNPL companies, and it will be interesting to see how the future of BNPL in India plays out.

(Vaibhav Agarwal, Vaibhav Goel are 2nd year MBA students and Anuj Kapoor is a faculty member in Marketing, Ahmedabad Institute of Management, India)