The Smart Girl's Guide to being cautious with Buy Now, Pay Later schemes

We speak to experts to understand what is driving the growing popularity of short-term financing

Things couldn’t have come at a worse time for Richa and Yuvraj Singh. It was the end of the financial year, the income tax payments had put pressure on their monthly budget, the playschool fees for their twin toddlers were due as well. Unfortunately, the month had been topped with another financial expense—the washing machine had finally given up. They had three options—one, to stack up more debt on their credit card which was going to foot the fees; two, take out a personal loan at the bank; or delay buying a new washing machine. With toddlers in the house, the first option, though expensive, seemed like a quick fix—until they came across a killer deal on an e-commerce site which offered a plethora of interest-free, Buy Now, Pay Later (BNPL) options. Not only did they get a good discount on the product, which was delivered immediately,  but they were also able to slice and stagger the payment over six interest-free installments, thus giving them some financial respite.

Like the Singhs, a growing number of young Indians—especially millennials and Gen Z consumers—are waking up to the convenience of Buy Now Pay Later  financing. From everyday groceries, consumer goods and travel expenses, to education, electronics and luxury goods, Indians are using BNPL to fuel and finance their needs and aspirations. YouGov's research reveals that typical BNPL users in India fall within the age group of 30 to 39 years and are primarily located in Tier-1 cities. Moreover, a significant portion of these users are employed full-time, with a substantial proportion belonging to high-income categories. 

As a financial services innovation product, BNPL represents the demographic, data, and digital dividend that India is witnessing, says Shweta Shetty, Partner, Consulting, Deloitte India. “With the growing middle class buying power and aspirations, BNPL is likely to remain popular as it has a strong customer value proposition of being a unique ‘Point of Sale’ financing option with ease of fulfillment. It  provides the customer with a bridge between affordability, access, and aspiration with superior user experience and minimal documentation, better upfront pricing, and quick approvals and disbursals.”

To be sure, a number of factors are fuelling this trend, says Shetty—the rise in mobile and Internet penetration has increased the adoption of smartphones and digital payments. Moreover, India is expected to reach 900 million active Internet users by 2025. Coupled with rising household income in India, has provided consumers with greater financial resources, which, in turn, have translated to an increase in  discretionary spending. The rise of e-commerce in India has also contributed to the adoption of BNPL financing. According to a report from Benori Knowledge, BNPL will drive approximately 14 per cent of all e-commerce transactions by 2026, representing nearly a fivefold increase from 2021. Most importantly, BNPL financing is inclusive of consumers who may have no credit history or may not have access to traditional credit options such as personal loans and credit cards.  

Riding on the back of this wave are a number of BNPL players such as LazyPay, Amazon Pay Later, Patym Postpaid, ZestMoney, Ola Money Postpaid, and Mobiqwik, among others.

What is Buy Now, Pay Later financing?

Buy Now, Pay Later financing is a short-term financing option which allows consumers to make purchases and pay for them over a period of time. It breaks their purchase into a set of smaller, no-interest or low-interest payments. Today, this type of installment plan is offered to customers through various channels. It could be at the point-of-sale by retailers, through pay-later apps offered by fintech companies, allowing consumers to make purchases using a virtual wallet and pay in installments, or through credit card companies which offer BNPL features to their customers, allowing them to convert purchases into installments.

Customers generally have the option of paying back the entire amount in 15 days, or can split the amount into installments over a period of time. Typically in order to use pay-later apps, you must be over 18 years of age and under 65 years, a resident of India, and have a bank account, PAN card, and Aadhaar card. Having a credit card is not mandatory. 

How does BNPL work?

Once you meet the basic criteria, the process of getting BNPL financing is fairly easy and transparent. Most BNPL service providers tend to work on similar models with some variation in their terms and conditions. You can make a purchase at any participating retailer, and opt for the BNPL option at the checkout stage. A small payment of the overall purchase amount is made, and the remaining amount is to be paid in a series of interest-free installments. The payments can be made through debit card, credit card, or a bank transfer among other options. As long as the payment is made on time,  no interest or a lower rate of interest is charged, failing which, the consumer may be charged anywhere between 10-30 per cent interest, depending on the terms and conditions.  

What are the benefits of BNPL financing over other options?

For consumers, opting for a BNPL over other conventional financing options provides a range of benefits, says Shetty.

Instant, quick and easy access to credit with minimal documentation: This is in stark contrast to traditional financing products, which often involve lengthy approval processes, complex terms and conditions, and extensive paperwork. According to a study by TransUnion CIBIL, 35 million consumers opened their first credit product in 2021, and an additional 31 million became New-to-Credit through the first nine months of 2022. BNPL services often have more lenient credit requirements compared to traditional options like personal loans or credit cards. If you walked into a bank and requested for a personal loan, you would have to juggle a lot of requirements. This makes it possible for first-time borrowers without an established credit history to access credit and make purchases, thus expanding the potential customer base for BNPL providers, says Shetty. 

A streamlined customer experience: BNPL services are often offered through apps which comprise immersive digital experiences, or are embedded into e-commerce portals. This means the consumers have a hassle-free experience at every stage, from application to payment.

Frequent interest-free options: BNPL allows consumers to spread their costs over time without incurring additional charges or high interest rates. This can be particularly appealing for a younger demographic, when compared to opting for credit cards or personal loans, which often come with high interest rates.

A minimal impact on credit score: BNPL services often do not impact a customer's credit score when they use them. On the contrary, personal loans might affect credit scores, depending on the credit inquiry and payment history.

Merchants benefit: Merchants also find BNPL services attractive because they can help boost sales by offering flexible payment options, potentially increasing the average transaction value.

What should you watch out for?

While the BNPL option offers a host of benefits, there are potential dangers of opting for these schemes too, say experts. While BNPL offers a modern solution to the financial needs of consumers, it also retains many of the risks associated with traditional financing alternatives, such as incurring late payment fees, or potential implications on credit score owing to late or missed payments. Additionally, the ease of obtaining a BNPL service can lure consumers into overspending, debt accumulation, and over-reliance, making it important to choose these services in moderation and only when necessary, cautions Shetty. 

“The ease with which one can access BNPL financing is perhaps the best and the worst part about this option,” says Vishal Dhawan, CEO and founder of Mumbai-based Plan Ahead Wealth Advisors. He maintains that there is a danger of falling into a debt trap, if loans stack up, or if one is taking out too many BNPL loans at the same time. “Whenever you buy something online, the website will always prompt you to buy something else along with it, creating a tendency to buy more than what you actually need. So it’s critical not to overspend. It’s also important to be clear about why you’re opting for BNPL. If you do have a cash-flow problem, a BNPL scheme doesn’t solve it; it could actually exacerbate it. Ensure that you use it as a solution that gets you a good deal or a discount,” he explains. 

How can you protect yourself?

It is best to not over-reach when it comes to loans unless it is an emergency. Experts recommend restricting the number of BNPL loans to one or two at a time. Jot down the dates and timelines for the payments so that you don’t fall behind. Set up an auto-debit facility to ensure payments are made on time if you have the option, and ensure that there is enough balance in the account when needed. Avoid paying the BNPL with a credit card as you could end up with more debt if you carry it forward. “Before committing to any financial obligation, it is imperative for consumers to meticulously review and understand* the terms and conditions. These include the repayment schedule, fees and charges, interest and interest-free period, total cost, and the impact on the consumer’s financial goals, data privacy, and the consequences of late/missed payments,” says Shetty. 

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