A few weeks back, I was talking to a cousin who told me that he wanted to buy the latest iPhone model which cost about Rs 1.2 lakh. He also mentioned that he didn’t have the money to buy it immediately. So I suggested he start a bank RD (recurring deposit) to accumulate money for the purchase.
A couple of days back he sent me a Whatsapp message with a photo of his new iPhone and a new iWatch. I was surprised but guessed what had happened. He confirmed my guess when he told me that though he couldn’t purchase both the devices upfront on his own, he managed to do it via the Buy Now Pay Later (BNPL) option that allowed him to split the repayment into parts without interest.
This is a trend that is catching up with many youngsters now. They are looking to use BNPL to buy expensive gadgets which are unaffordable for them.
BNPL is changing retail spending just the way EMIs did. And I think this is an irreversible change. Since BNPL is an interest-free payment option, customers are using it rapidly to satisfy their shopping demands. Without guilt.
In fact, many consumers don’t even think of BNPL as Debt. It is often positioned as a new way of buying things and not exactly as borrowing. And like Credit cards, even the BNPL separates the pain of payment from the engagement of buying.
With BNPL, you can ‘Buy Now’ but can easily ‘Pay Later’.
I wrote about it in detail here what is BNPL. To summarize, what happens exactly is that you get to buy stuff now and pay later interest-free as long as you repay the entire ‘loan’ amount on or before the due date. But if you miss the timely repayment, then you will end up paying costly fees and interest at rates much higher than even those of the typical credit cards.
In a way, it’s like how credit cards work. Only thing is that the borrower does not need an actual credit card to get that line of credit. No doubt it does provide a frictionless experience that makes shopping more seamless these days.
The ‘buy now pay later’ options are readily available at the checkout of various online merchant websites/apps these days. In fact, many new tech companies/startups are providing easy options that help merchants in setting up online payments options.
But the easy-to-use BNPL options available at the checkout on websites/apps have a flip side too. The ease of use makes buyers-cum-borrowers ignore the terms and conditions which are attached to BNPL options. People get lured at zero cost loan facility. As a result, the BNPL gives rise to impulsive shopping and thereby, encourages customers to check out with a cart that is a lot heavier than what they originally intended. That is, BNPL tends to motivate customers into splurging more than they might normally afford to. This is a similar con to that of credit cards but with BNPL, it’s a lot more convenient and doesn’t actually seem like borrowing at first.
What happens is that when buyers see a lower price tag (although in actuality it is a time-lagged fraction of the original price), they are tempted to buy something that is out of their budget, splurge, or makes impulse purchases.
So in a way, BNPL can push consumers into credit trouble much faster than credit cards.
But while BNPL is still in its nascency in India, it really change the credit behaviour trend of first-time borrowers from organized lenders here. Earlier, it was more about getting unstructured and casual credit in smaller retail shops and were confined to the regular stuff like groceries. BNPL is bringing in new and different categories into the credit scope.
BNPL has helped customers break down large expenses into smaller, interest-free EMIs, rather than having to dig deep into their wallets. It has not only eased purchases of daily essentials but even brought aspirational products within reach of the common Indian now.
BNPL also offers the merchants new insights into consumer buying behaviour
But is BNPL a credit card killer?
As of now, the card networks and traditional players are too integrated into the payments infrastructure for many of these new services to represent an immediate threat. But in the long term, it has the potential to make a dent in credit cards’ market share definitely.
BNP is gradually but surely altering consumers’ credit behaviour. The one-click, ease-of-use and smooth procedure is surely going to push consumers to spend above their means. Good or bad is another matter. It is just like a knife. How you use it is up to you and you cannot blame the knife for your mistakes.
BNPL mindset is detrimental to long-term financial well-being if you get into a habit of it. Remember that it’s basically a temporary loan. And any loan is still a loan, and you have to repay it. In general, you are better off avoiding loans. If you get into this habit of BNPL, you can very easily get into a debt trap and spiral downwards. And debt trap may lead you to bad repayment behaviour and that can impact your credit score.
And don’t be under the assumption that BNPL companies are not here to make money as they are offering you an interest-free line of credit. These companies are here for profit. How do BNPL Companies make money? From borrowers, they take interest (for payments beyond the due date) and late fee charges. Sellers too, they get their share of income or commission. The seller or merchants usually pay BNPL companies a percentage of the purchase amount.
It is a powerful tool but ideally, BNPL is not meant for every purchase a consumer wants to make or for that matter, everyday expenses. It should be only considered as a stopgap credit facility that people in a liquidity crunch should tap into. It is not and should not be treated as a second source of income to spend more. BNPL, as is the case with credit cards, is best suited for users who are able to pay back their bills on time, and in full (or in the interest-free ‘pay-later’ period).
In fact, there is data to support (via this Fortune article – link) that quite a few times, it’s the financially vulnerable who opt more for the BNPL mode of payment.
I think that just like the concept of loan EMIs and then credit cards became part of Indian lives, even BNPL is expected to become an option in borrowers’ armoury. It is up to the borrowers to not use it unnecessarily.