BNPL: Boon or Bane

Buy Now Pay Later (BNPL) is a new craze in short-term financing that allows the buyer to pay in installments by the end of stipulated period of say, 6 or 12 months by using apps like Paytm, PhonePe, BharatPe, ZestMoney, LazyPay etc. Now some banks have also started offering this facility.

Whether it is your electricity or other utility bills or your holiday plan, whether it’s a consumer product or luxury one, flexible and deferred repayment schemes are there for you.

Under BNPL scheme, one purchases a product, but doesn’t pay immediately. He signs up with a lender who pays for him. Now he has to return the money to lender either in lumpsum or EMIs within a stipulated period. If he fails to repay, the lender will charge interest on that amount and his credit score will drop.

BNPL is the latest financial pied piper leading the millennial and Z generations as well as those located in smaller and unbanked areas. It has come as a boon to the first-time borrowers shunned by banks. It has also caught the fancy of the aspirational middle class.

Changing consumption patterns, rising aspirations, no operational costs, smartphone adoption, one-click offerings, seamless KYC and on boarding etc are fuelling the fire of BNPL.

It is attracting more and more customers to purchase an item of choice instantly without much hassle, just after making a small down payment. It’s popularity has exploded and it’s market is worth around Rs 0.26 trillion that is expected to reach Rs 3.75 trillion in the next 4 years. The pandemic has only accelerated its adoption.

Now the question is how these BNPL players make money for survival. These are not, after all, charitable firms, providing free lunches. In fact, BNPL players get a fee of say 2 or 3% of the amount sold from the seller. If not repaid by the buyer in time, they also charge hefty interest thereon and also late fees.

Delinquency rate is disproportionately higher than the average unsecured loans, though typically the credit limits are less than Rs 25K. The staggering growth of BNPL may lead to over-leveraging and put the financial system at risk. The players are neither checking credit scores nor reporting to credit bureaus.

BNPL players are, however, confident that truants will be weeded out and their products will perform well. They have their own analytics and predictive models to assess the background and buying behaviours of buyers to arrive at the buyer’s paying capacity. However, I strongly feel that there should be a verification agency for digital lending apps.

Availing a loan never sounded more enticing with दे देना आराम से (take your time to pay back). But every thing has two aspects. BNPL is not an exception. It improves a borrower’s cash flow if used prudently by repaying the amount within the interest-free window. But it seldom happens. People end up in over-spending and land themselves in trouble. But that is their own making.

Default is a cuss word in banking and finance. Financial discipline is as necessary as any other discipline.

–Kaushal Kishore

images: pixabay

19 Comments

    1. To my mind, sanctions are cosmetic steps, just a lip service to show solidarity with Ukraine. Such sanctions are not new for Russia that has already made provisions for a few months. If Russian banks are excluded from SWIFT, the global financial artery for transfer of funds across borders, it will have some impact on its payment system.

      But the moot point here is that sanctions also affect the economy of the imposing countries to some extent. Countries like Italy still want their exports to Russia to continue as usual. Mind you, Russia is largely an exporting country of natural resources. European countries are largely dependent on Russia’s natural gas and petroleum. So it’s easier said than done.

      Liked by 1 person

  1. Wonderful post Kaushal ji. You have covered the pros and cons of BNPL. I have not used this facility. I use credit card. I try to avoid credit card also.
    Normally I use debit card/ gpay or online pay. However you have covered the good and bad of Buy now and pay later. Great 👌
    Regards🙏😊

    Liked by 1 person

    1. As I have said it has both aspects. If you use credit card prudently, you get interest free fund for a few days that may be handy in certain emergent situations. The only thing to remember is “no default.” It will ruin not only the credit score, but also personal finance. Thank you, Arun ji for shary your own experience 😊💐🙏

      Like

  2. This post, Kaushal, gives excellent advice on the danger of borrowing, sometimes impossible to avoid if buying a house, as is standard practice in the UK. The lenders and the banks
    usually check the credit worthiness of the applicant, and this works well unless someone gets very ill or loses his job, then the insurance steps in.

    The consequences of punishing Putin will be rising inflation, small/acceptable price to pay to punish the monster. He will suffer too as his personal assets and these of his country are frozen,
    There are many other “cannot do” things, although he has friends in China and India,

    Joanna

    Liked by 1 person

    1. Thank you, Joanna for appreciating the post. In India, there are exemptions from Income Tax to certain limits on home loans. That’s why it’s advisable to seek home loans from banks instead of instant purchase.

      As regards Putin and sanctions, I have shared my thoughts with David above on their impact. Since you have mentioned India, it can’t forget 1971 when Nixon sent 7th Fleets task force led by the nuclear powered aircraft carrier USS Enterprise and Britain sent its naval group led by the aircraft carrier HMD Eagle to threaten India. It was the Red Navy that blocked USS Enterprise. There is a very thin line to define whether it’s invasion or liberation, whether it was Iraq, Libya, Vietnam, Crimea or now Ukraine. We don’t support any invasion including Ukraine. Abstention doesn’t mean support.

      Like

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