Is India cultivating the path for SNBL Startups?
Introspecting about the financial choices of today’s generation!
Heard about the RBI’s plan to transform the BNPL offerings? Wondering about what is BNPL, and what it is doing so wrong to the society that it earned itself an esteemed position on the RBI’s hit-list? Pondering about how will you buy the new Mac or go on your dream vacation without the use of a BNPL scheme? Then, you have come to the right place!
Let’s take a look at the different ideas that this blog will cover —
- Illustrating the BNPL Scheme, along with it’s pros and cons
- What is RBI doing to transform the BNPL offerings in India
- An alternative to BNPL Model
This blog will be revolving around the Indian economy, thus, all the perspectives and statistics mentioned in this blog will be associated with the same.
Diving into the BNPL scheme
A majority of you would be familiar with it, and some of you might have even used it. Abbreviation for “Buy Now, Pay Later”, BNPL schemes started to show around in the Indian economy, somewhere in the previous decade around 2013. The aim was to bridge the huge gap in the lending market of India. A BNPL scheme is pretty similar to how a typical credit card / bank loan works, with some small exceptions that made them largely attractive to the Indian citizens, especially to the younger generation. A typical bank loan or a credit card is issued only after the user meets certain requirements, and such users only formed a small proportion of the Indian lending market. Here steps in the BNPL startups, offering their “no-interest, paper-less” credit to almost anyone having a bank account.
As of the current date, there are a multitude of platforms offering BNPL schemes in India with their own little nuances. These include (but are not limited to) —
- Amazon Pay Later (Launched in 2020)
- Axio (Founded in 2013 | Funding of $200M+ | 3K+ Merchants & 6M+ Users)
- ePayLater (Founded in 2015 | Funding of $15M+)
- Flexmoney (Founded in 2015 | Funding of $4M+ | 200K+ Merchants)
- Flipkart Pay Later (Launched in 2020)
- LazyPay (Founded in 2013)
- OlaMoney Postpaid (Launched in 2018)
- Paytm Postpaid (Launched in 2019)
- Simpl (Founded in 2015 | Funding of $70M+ | 23K+ Merchants & 7M+ Users)
- ZestMoney (Founded in 2016 | Funding of $120M+ | 10K+ Online Merchants, 75K+ Physical Retail Stores & 17M+ Users)
Now, this all sounds nice, doesn’t it? I can borrow money to go on my dream vacation, and pay it back without incurring any interest and without delving in the heaps of paperwork! So, why shouldn’t I? The answer lies in the way these BNPL providers make profits! There are 2 primary sources of profit for a BNPL provider —
- First, all the merchants have to provide a small fee as a part of the transactions that take place through these BNPL platforms. But why would the merchants do so, if they can simply carry out their transactions in cash, UPI, etc without sharing their profits? Ironically, the answer is increased profits! BNPL increases the purchasing power of the customers, which results in increased sales, leading to increased profits for all the partnered merchants.
- Second, the penalties on late payments and defaults. If by any reason, one is not able to clear his/her dues on time, the providers impose hefty charges on the consumers, which could push the consumers down a debt trap, i.e., acquiring more credit to pay off the existing dues, and so on. In simple words, the BNPL provides are counting on you not clearing your dues!
Although, we, as customers don’t have anything to worry about the first source of profits; the second source of profit is something that happens to be an alarming source of concern, i.e., the hefty penalties, which could push us into a debt trap. This is one of the major reasons why users of BNPL services must proceed with caution. Now, to conclude this section, let’s take a look at the cons, followed by pros of BNPL services. The cons are as follows —
- The first major disadvantage as we discussed is the high likelihood to fall into a debt trap. Now, that is possible even for a typical bank loan, isn’t it? It indeed is, but in order to get a bank loan, one must have the required CIBIL score, and in certain cases, must keep some of his/her assets as a collateral as well. It is the instinctive behaviour of human beings to proceed with extreme caution when something of their own is at stake (as in the case of a bank loan), but as the requirements become less and less stringent and with nothing of their own at stake, one tends to acquire more and more credit (as in the case of a BNPL provider).
- Moreover, a bank will only provide the credit if they believe that one is financially sound enough to pay back the sum of principal and interest. But a typical BNPL provider will try to cut-short this procedure as much as possible, providing credit to almost anyone and everyone meeting the bare minimum conditions. In other words, financially educated and established professionals are the major acquirers of bank loans, while the young professionals and students (who have just started earning and are vulnerable) are the major acquirers of BNPL credit.
- Another major disadvantage is that BNPL services are a major cultivator of detrimental financial habits. Our generation, also popularly referred to as the “TikTok generation” is highly swayed by the so-called “social influencers”, to buy the new pair of shoes, the new smart-watch, the new hoodie, etc that shows up in the market. While earlier, people used to indulge in good financial habits, such as saving their earnings, investing their earnings, etc, in order to purchase these commodities, nowadays, people tend to overlook these beneficial financial habits.
- Lastly, I believe that BNPL services have fuelled the need of humans for a constant acknowledgement, the need to be always the centre of attention. A simple hypothetical example is say, in pre-BNPL era, a group of 5 equally earning friends could only purchase shoes worth up to 1000 INR, and now, in the post-BNPL era, where each of them can easily acquire credit up to 10,000 INR; one friend buys shoes worth 2000 INR, then the other buys shoes worth 4000 INR, and the cycle goes on.
That pretty much summarises the cons! Up to this point, we have only been looking into the cons of BNPL services. It clearly doesn’t mean that they don’t have any pros. Wondering about the pros of BNPL services, I believe that I would feel grateful if at least some BNPL providers are around the block; let’s see why —
- In emergencies, which necessitates the need for a small sum of money in a short period of time, BNPL providers are a great choice. For instance, your pay-day is due in 7 days, and you need to quickly book a flight for your parents. You can certainly use a BNPL provider as long as you ensure to clear your dues once you get your pay-check, since in this case, a bank will not provide a loan for such a small sum of money, and a credit card will most likely charge you some interest.
- One other major advantage is that with the aid of a BNPL provider, essential commodities can be purchased in due time, despite the absence of a large sum of money at present. For instance, the refrigerator suddenly breaks down, and it needs to be replaced immediately. In this case, one needs to have a considerable sum of money to spare at the present, which might not be possible. In such a scenario, a refrigerator of say 60,000 INR can be purchased with a 10-month credit of 6,000 INR each, without having to pay a large interest, or even no interest at all.
So, BNPL providers are good in certain scenarios, but one should always remember that credit is not a part of one’s wealth!
RBI’s efforts to transform BNPL services
In order to make it less tedious, I will be using BNPLs as a concise way of expressing “BNPL providers” here onwards.
Now, before we can understand, what RBI is doing to transform the BNPL services of today, we need to look at why RBI is at the fence, when it comes to BNPLs, and for that, we need to understand how BNPLs function. Although we have learnt a little about how they function, and how they are different from the existing credit sources (in the preceding section), we still are unaware as to how they function under the hood. So, allow me to explain it in very simple words.
The target customers of BNPLs are the ones who are at the bottom of the CIBIL score pyramid. The banks didn’t want to provide a credit card to these customers due to the higher risks involved, so the BNPLs thought to provide one. But as per RBI norms, only banks can issue credit cards. So, the BNPLs came up with something known as Prepaid Payments Instruments (PPI) (similar to Paytm wallet), which one can fill up using UPI, debit cards, etc. Now, once again, as per RBI norms, these PPIs can only be issued by banks; and additionally, the banks didn’t want to extend credit to these PPIs (due to the higher risks as aforementioned). So, in order to make this model functional, BNPLs needed 2 players —
- First, a bank which will only issue the PPI
- Second, a Non-Banking Financial Company (NBFC), which will extend the credit to these PPIs
So, this way, the bank only has to issue the PPIs; all the risks were shared between the BNPLs and the NBFCs; and even the ones with low CIBIL score could enjoy a credit-card like experience. And this PPI-model has done wonders for the BNPLs. Here are some statistics (prior to RBI’s guidelines) —
- The BNPL industry in India grew by 539% in 2020, and by 637% in 2021. (Source: 5paisa)
- India’s BNPL market stands at around $3–3.5 Billion. (Source: The Times of India)
- 22% of consumers in India bought goods using BNPL services. The 26 to 35 age group is the primary segment of the BNPL market in India. (Source: Business Wire)
- Nearly 70 million Indians have access to credit, accounting for 7% of India. Still, 93% of Indians do not have access to credit. (Source: Business Wire)
Now, you must be wondering, there seems to be nothing wrong in the model that is used by BNPLs till date, so, why RBI is so upset? The reasons are plethora, of which some are as follows —
- Providing credits without a complete KYC (Know Your Customer) check
- Failing to submit the credit details to the credit bureaus
- Extending loans to minors without the consent of their guardians
- Imposing unacceptably-high, late payments and interest rates; violating the RBI’s guidelines
- Misleading customers by not disclosing loans taken on their behalf
Some of the above scenarios are really scary from a customer’s perspective, and that’s why, RBI is taking the necessary steps in order to curb the financial malpractices undertaken by BNPLs. As per the new norms, BNPLs can’t extend credit through their lending partners anymore, i.e., the NBFCs, pushing the BNPLs to adopt one of the ways —
- Either stop providing these PPIs completely (which would cut down the major stream of revenue for BNPLs)
- Ask the banks to extend the credit line, in place of NBFCs (which would increase the risks for the banks)
- Ask the NBFCs to apply for a credit card license (which might have it’s own challenges)
- Start providing RBI-permitted co-branded credit cards, but in this case, RBI limits the role of co-branding partner (BNPLs) to the marketing and distribution of cards only. This means that BNPLs won’t have access to any transactional data, which forms the core competency of the BNPLs.
Now, let’s see, if any revisions will be made in the new norms of RBI regarding the model followed by BNPLs.
In order to compose this section, I took reference from various sources, all of which are mentioned below.
Alternative to BNPL Model
Now, you must be wondering if there are so many downsides of the BNPL model, then is there any other worthy contender, which can serve as a viable alternative to these BNPLs, and fortunately, the answer is YES!
With the new RBI guidelines creating the clouds of uncertainty for the BNPLs, many fintechs are exploring the “Save Now, Buy Later” model, also popularly known as the SNBL model. These include fintechs such as Multipl, Tortoise and Hubble. First, let’s see how this model differs from the BNPL model. In this model, instead of acquiring credit, the users save money, and once their savings hit the target, they can purchase their desired products. Now, you must be wondering, how is this any different from saving money in a bank account? Unlike a bank account, in which you will only get a small interest on your savings, SNBLs also offer you additional returns on your savings, which could be in one or more of the ways as follows:
- Some SNBL providers invest your savings in the capital markets to provide you with additional returns. For instance, with Multipl, you can invest your savings in personalised mutual funds recommended by their SEBI-registered investment experts.
- Some SNBL providers also allow your saving instalments to go to the merchants as advanced payments, in return of which, the merchant provides you with additional discounts.
- Like the BNPLs, the SNBLs also have partnered merchants, and carrying out transactions with these merchants via the SNBLs can provide with additional benefits.
Apart from all these advantages, SNBL is a model based on plannable spending and aims at creating a positive habit around saving money, a financial habit that has been passed down from one generation to the next. Seems like this model outsmarts the BNPL model in every aspect, but there must be a downside, right?
If you think about it closely, it’s not actually a downside, but the natural human tendency, which is one’s ability to hold true to his/her resolve! If a new pair of shoes come up in the market, do you have what it takes to save up to say 3 months, and then buy the shoes, instead of buying the shoes right now, and then pay later up to 3 months? If you don’t, no worries, it’s never too late to transform yourself!
Conclusion 👋
If you are a frequent user of BNPLs, then do let me know in the comments section, whether BNPL services have played in favour of you or against you, in meeting your financial goals!
I really hope that you liked this blog, and if you did, do put your hands together 👏 and if you would like to read more blogs, then #StayTuned. Connect with me on LinkedIn and Twitter.
