Demystifying the buzz around BNPL

Afterpay, Affirm, Klarna, Zestmoney, Lazypay - surely you would have heard one or more of these names recently. These are some of the largest buy now pay later (BNPL) providers in India and the world. The Global BNPL space is abuzz with massive deals like Square’s acquisition of Afterpay for $29 billion, PayPal’s acquisition of Paidy for $2.7 billion and Affirm landing a partnership with Amazon. Back home, we saw Zestmoney and Capital Float raising $50 million in funding each to power their growth on the back of this global narrative. Read along to understand what BNPL is and why there is so much investor interest in this sector.

Suppose you are starting your first job soon and decide to make a good first impression by buying and showing up to work in great formal wear. But you are low on cash and your first salary will be credited at the end of the month. You think about two possible solutions - credit card or personal loan - but both have limitations. One, without any credit history or pay-slips, banks will deny you a credit card. Even if you were issued a credit card, you’re not sure you’d be able to pay back within the 4-7 week long free credit period. Two, you’re not willing to pay interest!

Just as the above situation, there are many more such examples in everyone’s life like buying furniture for your house or buying a macbook or booking hotels/flights for travel.

BNPL players come to the rescue by extending a line of credit to new-to-credit customers and that too without asking for any collateral. They do this by mining digital data and using superior models to identify risk. Plus, their risk is spread across thousands of customers with low ticket sizes so overall default risk is in check. The acquisition channel is primarily digital so the cost of operations is less. With low costs, they enable zero-interest credit for users. Therefore, the BNPL player is able to offer you a small ticket credit line for short duration at a small convenience fee without need for excessive documentation.

Across the table, merchants greatly benefit by this magical expansion of everyone’s buying ability. For this increase in sales, the merchant is willing to fund a part of the interest on your loan and also pay a transaction fee to the BNPL player. For the lending partner, the benefit is an increased loan book which comes at a relatively low acquisition cost. The convenience fee from the customer and the transaction fee from the merchant cover the BNPL player for the interest they forgo on customers. A win-win for everyone!

How does BNPL work?

There are 4 major entities involved in the BNPL ecosystem - consumer, merchant, BNPL/technology marketplace and the lending partner. In some cases, the BNPL player and marketplace can be separate entities. But the BNPL player integrates with the other three entities. The generic flow is - the customer arrives on Amazon (example), browses goods, selects and moves to checkout. In the checkout process, the customer sees a paymode titled BNPL and selects it. Amazon’s BNPL provider sends this request to the lending partner (e.g., Banks, NBFCs). The lending partner evaluates the customer data and communicates the approved credit limit back to the BNPL provider who relays the same via Amazon to the customer. The customer uses the credit limit to pay and the merchant dispatches the goods.

What is the future of BNPL?

Well, for starters the investors are super bullish evident from the deals mentioned at the start of this article. Much of the growth is poised on increased customer adoption and higher penetration in tier-2, tier-3 and unorganised customer segments. At the same time, BNPL is a good acquisition tool to get premium customers looking for cheaper credit, where cross-sell opportunities can come up later. With increased competition, the players who have access to merchants and customers have the upper hand. In countries with a relatively mature BNPL offering such as Australia and China, banks have started partnering with BNPL players to recapture their lost revenue pool from shrinking usage of credit cards and loans. Recently, Mastercard announced their BNPL program and Visa announced BNPL APIs for its clients to pilot their own installment programmes, signaling that network providers are joining the bandwagon.

Will BNPL kill the traditional credit card industry in the future? We’ll find out. What we do believe is that BNPL is here to stay and expected to grow multifold in the coming years. Let us know how you feel about this entire BNPL frenzy in the comments.