Breaking Boundaries: India’s Buy Now Pay Later Phenomenon Sparks Credit Revolution- But Is it Sustainable?

The Buy Now Pay Later (BNPL) market in India has experienced an unprecedented surge, becoming a catalyst for the credit revolution in the country. With a staggering compound annual growth rate of ~321% between 2019 and 2021, the BNPL industry has witnessed remarkable growth. The sector is currently driven by factors such as increasing smartphone and internet penetration, coupled with unmet credit demands that were unfulfilled by the credit card players. However, amidst the skyrocketing growth, the sector faces certain challenges like the lack of government regulations and the rising number of BNPL fraudulent providers. Now this raises a question on the sustainability of the BNPL market. Here is Ken research observation on the landscape of the BNPL industry in India.

1. Buy Now Pay later Services (BNPL) are recognized as Proxy lending services by RBI: BNPL companies are proxies between lending partners and customers

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2. In India, increasing smartphone and internet penetration, and credit demand unfulfilled by credit cards helped the BNPL players proliferate

The Supply side of BNPL Market is driven due to growing penetration of digital lending in Tier 2 and 3 cities…

Technological

• Increasing Smartphone penetration
• Increasing Internet Penetration and Digital Lending Demand In Tier 2 and 3 cities
• Vertical Search Engines (more customers via search engines)
• AI and Big Data Analytics (for targeting customers)
• Application Programming Interface

Internet Penetration

Internet Subscribers (CY’20)1	Broadband Connections (CY’20)1	Mobile Connections (CY’20)1
795.18 Millions	747.3 Millions	1153.7 Millions

Government Initiatives

• India Stack (Open Source APIs)
• Startup Ecosystem (Encouraging startups via funding)
• Digital India (to encourage adoption of digital payments)
• Adhaar Enrolment

Regulatory Enablers

• Framework for Account Aggregators and P2P lending platforms (Adhaar enabled KYC, e-sign, Digilocker increasing security of digital transactions)
• App based NBFCs
• Reserve Bank Innovation Hub
• Financial Inclusion Initiatives

Demand Side Growth Drivers

Demographic

• Younger Population (More easier adoption of new technology)
• Aspirational Consumers (driven by lifestyle needs)
• Increasing digital native population

Macro- Economy

• Pandemic Induced Financial Stress (~12% unemployment rate at the end of FY’21)²
• ~4% drop in per capita GDP (at current prices) from FY’20 to FY’21 due to the second wave of COVID 19³

Rise of Online Purchase

• A surge in online purchases during lockdowns
• Coupling with a tendency to save capital, BNPL becomes an ideal method of payment, similar to wallets
• Target customer base of BNPL is tech savvy: leading to faster adoption

Unmet Demand

• Low credit penetration to informal economy/sub prime borrowers/ loans of smaller ticket size (BNPL is more easier to acquire)
• High sensitivity of banks for assessing credit risk, while BNPL services are more lax

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2.1 Additionally, E-commerce and convenience offered by BNPL services are primary reasons for users to adopt Pay Later practices

Adoption rationale behind the fast adoption of BNPL services

• In the massive Indian population and middle-class context, the existing 60 million credit cards are not enough to address consumer credit demand.

• Lowered income and unemployment during COVID 19, and lower lump-sum capital investment, making alternative lending a viable option

• The thriving e-commerce market in India, which has been aggressively targeted for partnership with BNPL players

• Low credit card penetration coupled with BNPL’s frictionless credit experience has boosted a fast adoption of BNPL services

• Web of partnerships that spans all retail sectors and includes the most popular brands.

• Use of sophisticated risk management algorithms that allow companies to lend to previously unbanked clientele. 

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3.1 Also, the large number of fraudulent BNPL providers is a concern for the consumer that inhibits the growth of the industry: New regulations could change the scenario for BNPL companies

Challenges and Issues for a customer in the BNPL Market in India

Technological

• Smart phone requirement
• Internet Requirement
• No SMS based lending (with only cellular service available) hence limited with penetration

Security

• Increasing fraudulent apps springing up in the market
• App based Lending a front for many mafia like lending establishments

Number of App Stores in which Indian loan apps are available1	No. of illegal loan apps1	Number of Complaints against digital lending apps (Jan 20 to March 21)1
~81	~600	~2560

Social and Demographic

• The higher age group (>36 years) still resistant to adoption
• BNPL services viewed as “loan”, which traditionally has meant a high capital transaction in India
• Word to mouth limited as people often hide their credit lines, entirely reliant on merchant partnerships for promotional affairs

Challenges and Risks for a BNPL Service Provider

Regulatory

• RBI has proposed new guidelines to be established for BNPL companies.
• IT Act proposed to be amended, including BNPL services into the definition of “loans”

Partnerships

• Highly dependent on merchant partner performance
• Too many payment options in the food aggregator market
• Niche sector partnerships such as healthcare require more ground to cover (fragmented market)

Revenue Streams

• Low sensitivity to eligibility for credit leads to higher delinquency
• Business cannot handle delinquency of more than ~1%
• MDR highly dependent on customer ticket size and customer base
• Niche sector (Startup merchant partners) have lower ticket size

Customer Care

• Requirement of quick resolution of customer conflicts and issues (capital sensitive customer base)
• Tech failures such as app crashes can result in huge customer loss
• Lack of regulation means lower accountability from the customer as well

Source: RBI Report
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