Opinion: Unlocking ‘Buy Now Pay Later’ power

Engaging stakeholders -- BNPL providers and consumers – by providing an ‘Integrated App’ will help scale up the model

By Vaibhav Agarwal, Vaibhav Goel and Anuj Kapoor

The Buy Now Pay Later (BNPL) model has been under the scanner of the Reserve Bank of India (RBI) for quite some time, and finally, the RBI took measures to regulate the BNPL services. To give an overview, BNPL is a short-term financing option allowing users to purchase products now and pay later in instalments. Major fintech firms like Slice, Jupiter, ZestMoney and Lazypay hold a significant share of the BNPL market in India which currently stands at $3-3.5 billion. This is expected to reach $45-50 billion by 2026.

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

Growth Potential

Despite the cautious approach of the Indian banks towards BNPL, with the rapidly increasing internet penetration and smartphone usage, India will soon be the most digitally savvy country in the world. This, combined with the cheap mobile network and the advanced payment infrastructure, has also generated a 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 primarily because of the low-cost and transparent nature of the BNPL structure, together with its hassle-free credit approval plan. Another contributing factor is the rapid growth of e-commerce penetration in tier-2 and tier-3 cities.
According to Global Payments Report 2022, BNPL has already captured 3% of the market share in the online e-commerce payments segment in the country. After the Covid-19 pandemic, the growth of BNPL services in the country has been further propelled by increasing online purchases because BNPL lenders can help people with interest-free EMIs and loans.

Scaling Up

One way to scale up BNPL services and create engagement between stakeholders, ie, BNPL providers and the consumers, is to provide an integrated solution, ie, an ‘Integrated App.’ Many American and Chinese players have adopted this integrated platform strategy to offer shopping, payments, and financing options together to their users. The merchants are allowed to register on the ‘super’ app, through which a user can shop and also finance the purchase. This means, coupling the value provided by a seamless customer experience through an app along with ready financing to fund the purchase. A similar model can be implemented in India, unlocking the potential of the BNPL services from this opportunity.

The integrated shopping model will enable the BNPL services to become part of the customer experience end-to-end. Not only will the app be a one-stop shop for the customers, but it will also help the service provider to customise its product offerings as per needs. Advanced data mining tools will enable collating the data from customers’ buying patterns, further providing insights into their preferences. This information will also help BNPL service providers to understand current market trends, allowing them to partner with new merchants.
The integrated shopping app will add new revenue drivers, from advertising and affiliate marketing. These new revenue drivers will enable the BNPL service to offer customers more discounts and rewards programmes. Shopping from the integrated app will allow customers to buy from merchants where the BNPL service is not integrated at checkout. With everything integrated into one place, the cost of acquiring new customers will reduce significantly. The BNPL service will even be able to charge a higher service fee from the merchants with their increased brand presence, converting them from a payment-only service to a universal brand.

Further enhancement in brand positioning can be done by partnering with celebrities and influencers. Not only will it attract more customers to the platform but will also bring in merchants for all kinds of products. The enhanced brand image of the integrated BNPL service provider will also help small merchants garner visibility for their products on the platform. Thus, an integrated shopping model can turn out to be a game-changer in redefining the future of the BNPL market in India.

Uncertain Future

Despite the current growth potential of the BNPL market in India, the future seems uncertain. The RBI in its report on ‘Digital Lending including Lending through Online Platforms and Mobile Apps’ has recommended “categorizing BNPL under balance sheet lending (BSL), which should be allowed only to banks and non-banking financial companies (NBFCs) and classifying BNPL as a credit product.” This has been done because the BNPL providers characterise themselves as a replacement for credit cards but not a credit product. This enables them not to report their transactions with credit agencies.

The service providers further claim that since no interest has been levied on the customers, they do not fall under the definition of credit. The RBI’s concerns arise from the fact that these BNPL providers might continue to offer credit to someone with a bad credit record. When the customer stops paying, these companies will not fall under the purview of RBI’s code of conduct for collections as they haven’t recognised themselves as a credit product. The RBI has made it clear its stance on the need for regulatory approval for BNPL companies and it will now be interesting to see how the future of BNPL unfolds for India.

(Vaibhav Agarwal, Vaibhav Goel are 2nd year MBA students, and Anuj Kapoor is a faculty member in the marketing area at Indian Institute of Management Ahmedabad)