In the past 2 years, the ‘Buy Now Pay Later’ Industry has been one of the fastest growing industries in India.
What’s absolutely mind blowing is that the BNPL market is growing so fast, that it has achieved an insane growth rate of 569% in 2020 and 637% in 2021!
But on 20th of June 2022, the Reserve Bank of India made an announcement that shook the entire BNPL industry!
This notification disallowed non-bank prepaid wallets and prepaid cards from loading credit lines into these platforms.
This is a huge blow to some of the fastest growing Indian startups like Slice, Uniorbit and Jupiter. Until now these startups with their credit lines have played a vital role in taking financial inclusion and digitalisation to the next level in India.
So the question is:
What is the problem with the Buy Now Pay Later Industry?
Why is the RBI hindering their growth with these regulations in spite of the industry growing at such a rapid pace?
And most importantly, as students of Business, what are the study materials to help you understand the fast-growing BNPL market of India?
First we need to understand how these Buy Now Pay Later companies make money and where they fit in the market.
If you look at the income and the ticket size of credit in the Indian market you will see that, while car loans are given to people with average income of 3 Lakhs per annum with a ticket size of 5–7 Lakhs,
a credit card is issued to people with average incomes of more than 1.44 Lakhs per annum, with a limit of 25–50,000 rupees.
But below this Income Slab and Credit size, (people below the income level of 1.44 Lakhs and for a ticket size as low as 10k) there is no reliable credit instrument!
If you look at how many people in India own a Credit Card, you will find that only 3% of the population own one. The other 97% do not!
This is where the ‘Buy Now Pay Later’ models come in.
In short, the ‘Buy Now Pay Later’ Industry stands on the foundation of India’s credit gap!
But how do they work?
These BNPL services work just like a Credit Card EMI.
If you are a student who wants to buy a pair of shoes for 3000 rupees, but then you have only 1500 rupees in your account and your pocket money is only 2000 rupees. You wouldn’t be able to purchase it.
But here is where a company like SLICE comes and gives you the option to split the bill into 3 parts.
You just have to pay 1000 rupees each month for 3 months.
The best part is that they don’t charge you any interest if you pay them on time!
So you can get your 2000 rupees of pocket money and pay 1000 rupees every month to settle your bill!
Now the question is,
If Slice charges you 0% interest, how do they make profits?
If you look at this transaction closely, you will realise that in spite of you being a student without a credit card, not having enough bank balance and having less pocket money, a pair of shoes worth 3000 rupees became affordable for you!
Just like yourself, those shoes became affordable for thousands of college students in the market. If previously, only 100 rich kids in your college could buy those shoes, now 10,000 students in the college can afford them!
So this way, Slice has increased the probability of the sale of the shoes, it has increased the affordability in the market and most importantly, it has increased the scope of apparel companies to sell more high ticket products!
Companies could launch many more products upto the range 3000 rupees and still be confident about the sales!
In a way the entire market has expanded for the company! This market expansion is a very big value add for the companies in every single domain.
Here is where Slice’s profit comes in.
When you pay ₹3000 to Slice, Slice pays only ₹2850 to the shoe company, and keeps ₹150 as commission for making the sale happen!
(These are not exact numbers so the commission and charges may vary)
Apart from that, if you get late for your payments, Slice will charge you an additional interest which adds to its profits.
So when lakhs of people who don’t have a credit card make their payments, Slice makes high profits.
This is how the BNPL companies work. There are several variations in the format of their operation.
So when the market of these companies expanded, and more products became affordable to a larger segment of people; the BNPL industry exploded by a staggering 569% in 2020 and 637% in 2021.
This is a win-win, right?
The sellers get more customers, customers get to purchase in spite of less income and the FinTech companies make money!
So where does RBI have a problem?
To understand this, we have to go deeper into the payment ecosystem and understand something called the Prepaid Instrument or PPI.
When companies like Slice and Uniorbit expanded, they wanted to be direct competitors to Credit Card companies.
They came up with a Prepaid payment instrument like Slice card where you can load money and spend it wherever you want.
Shortly, they took it to the next level and started introducing a credit line in it because of which you could make the purchase even if you don’t have money in the card.
Here is where a new type of company comes in – banks like SBM bank of India and RBL bank!
This is because the Fintech companies alone cannot launch Prepaid instruments as they don’t have the Pre paid instrument license from RBI.
They have to tie up with an NBFC or a bank like RBL bank to issue a prepaid instrument; the Slice card.
It’s primarily a tech company with no PPI licence that issues a card in partnership with SBM Bank India, which has a PPI licence.
Similarly, Uniorbit Technologies has partnered with RBL Bank and SBM Bank to issue co-branded prepaid cards.
Here’s where a twist comes in:
These companies started posing as Credit Card challengers and issuing credit lines through their partner NBFCs and Banks.
So you could use your Slice card like a Credit Card to make transactions anywhere you want.
So a problem arose when the RBI banned the loading of prepaid instruments through credit.
Why did RBI ban this act?
This is what brings me to the dark side of the Buy Now Pay Later Industry.
Here are the 3 biggest problems with the BNPL market:
1) The first problem is that these features of Buy Now Pay Later are mostly being offered to people who cannot get a credit card; which means their income levels are more likely to be less than ₹20,000 and their age is likely to be less than 25 years.
There is a possibility that a credit line is being offered to people who might not have a lot of savings, or are not mature enough to handle credit, or do not even deserve credit at all!
2) This feature drastically increases the order value of the customers!
Eg. If you would normally shop for ₹1000 but after BNPL, you would shop for ₹1400 – 2000. You might end up buying way more than you can afford.
This is not a random statistic.
BNPL Company Klarna clearly states their service boosts the average order value by 41%.
American company Affirm claims to increase average order value by 85%.
So clearly, this facility of Buy Now Pay Later stretches the budget of the users.
3) It is known to put people in a Debt Trap because of irresponsible usage
This is very clearly seen in the foreign markets.
In Australia, 15% of BNPL users had to take out a loan to pay off their purchases, and in USA, about 1 in every 3 americans who used “Buy Now, Pay Later” services have fallen behind on one or more payments, and 72% of those people said that their credit score declined.
So clearly, the trajectory is expected to be no different in India.
These are supposedly the most critical reasons why the RBI had to prevent these companies from offering credit loading into their prepaid instruments.
Now the question is
With this extremely bold move made by the Reserve Bank of India, what will happen to the Indian FinTech space?
1) RBI is not against BNPL, it’s just that the cost of convenience is often underrated.
In this case, the foreign market clearly indicates a dangerous trajectory that we don’t want to get into.
2) PPI is still a minor source of income for Slice and Jupiter and they can still offer their services without the credit loading into PPI.
3) Furthermore, the Industry is seeking more clarity from RBI as to what is allowed and what’s not so that they can play by the rules and still do business.
Use BNPL services responsibly
Personally, I believe BNPL is a wonderful feature, provided you use it for the right reasons.
Using it to buy something important for your project, interview or freelancing is ideal.
But using the money irresponsibly to purchase unnecessary items for frivolous purposes like impressing people, will land you in trouble.
So use BNPL, but responsibly!