Analysis: Buy now pay later business model faces test as rates rise

Buy Now Pay Later schemes emerged as a boon for customers allowing them to pick up their favorite products. They could make zero down payment mobile phones online, often at zero percent interest rates. They had to ensure that they repaid the amount on time to become eligible for higher loan amounts in the future.

It completely changed the lending sector since brands either started partnering with service providers offering this lucrative scheme or came out with their own to attract consumers. Consumers on the other hand had access to more sophisticated and improved products that they could instantly pick off the shelves without digging into their savings. It’s a win-win situation for all.

However, this once-lucrative model is now facing a challenge. The challenge came in the form of a notification from the Central Bank on June 20, 2022, explicitly forbidding all fintech firms and NBCs from offering this scheme to consumers. It means that the credit lines offered via preapproved funds loaded onto digital wallets and stored-value cards could be no longer allowed.

The Buy Now Pay Later sector had been projected to be one of the fastest-growing in the country with a phenomenal rise in value from 3% back in 2021 to 8.6% by 2025. But, with this notification and the rising interest rates, given the looming recession predicted to hit sometime by the end of the year, it is a dual crisis on the cards to deal with.

How Does the BNPL Sector Work?

  • The way the system works is simple:
  • A customer purchases from a retailer that’s part of the BNPL network
  • Then they need to opt-in for the Buy Now Pay Later offer
  • Make a small down payment
  • The remainder of the amount is converted into Interest-free EMIs

Facts about the BNPL sector

  • The sector is expected to grow by 89.5% annually and could be worth $6.9 billion by the end of 2022
  • 30 million Indians are active borrowers under various BNPL lenders, and the number could grow anywhere between 90-100 million by the year 2026
  • BNPL doesn’t require extensive documentation like a credit card that requires a lot of paperwork before being approved

What Can the BNPL Sector Do to Tackle this Issue? 

One of the possible solutions that can be undertaken by these service providers is to increase transparency and follow guidelines strictly. It includes proper KYC of customers and documentation like credit cards or when a person takes a loan from a bank.

Moreover, it is important to restructure the business model so that other methods of handing out loans can be explored, such as via bank accounts of the BNPL company or by partnering with banks and coming up with co-branded credit cards to increase transparency and keep interest rates within check.

There is a requirement to take a balanced approach since the number of people being granted loans and the rise in defaults has a direct impact on the number of non-performing assets in the book of accounts which could become a major issue as pointed out in the notification.

The BNPL (Buy Now Pay later) sector could wait for the RBI to issue new guidelines dictating the terms under which these service providers could operate. They should strictly follow those guidelines to ensure that they can function normally and without further scrutiny from the central bank in the future.

The RBI’s latest notification doesn’t mean the end of the BNPL sector. It means that newer guidelines would be introduced to ensure that they become more transparent and function more in sync with other financial assistance providers such as banks and credit card companies.

Not only will it make more people warm up to the concept but also reduce the number of NPAs or non-performing assets on the books of these companies helping them grow and reach out to more customers in a more streamlined manner!

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