The Downside Of Buy Now Pay Later Concerns are being raised about how the successful model is promoting instant gratification and needless spending among youth

Since last two years, BNPL (Buy Now Pay Later), a scheme in which consumers buy a product and make staggered payments in a time period of say 10-15 days and in some cases as no-cost equated monthly installments (EMIs) for three to six months, has been considered a promising model in fintech.

It was said that it was a win-win proposition for all stakeholders. The seller gets instant payment and increased cart value, increased conversion rates and overall footfall and the consumer gets affordable solutions that increase her purchasing power. The key reason for BNPL's popularity is cheap credit, often offered at zero interest cost. The model clicked well with the younger generation that doesn't have credit cards.

Many players in the space such as ZestMoney, Ezetap, KredX, Amazon Pay, LazyPay, Simpl and Slice, came to the fore. They raised many rounds of funding as well, up until the start of the funding winter. For instance, in July, SaveIN raised more capital from its existing investors as a part of its seed funding round, taking the total amount raised to over $7 million, in September ZestMoney raised $50 million in its Series C round and in October, Mumbai-based fintech startup Snapmint raised $21 Mn in a mix of equity and debt.

According to Experian, a data analytics firm, BNPL transactions in the country surged by 21 per cent in H1 2022. However, today, concerns are being raised about how the successful model is promoting instant gratification and unnecessary spending among youth.

"Ably driven by their digital prowess, young and aspirational Indian consumers gravitate toward BNPL. India's BNPL industry is valued at $3-3.50 billion and will surge over tenfold by 2026 . While paying in instalments isn't new, the rapid rise in popularity of BNPL and easy access to credit has increasingly sparked concerns that it will encourage unsustainable consumption patterns and debt," said Gauri Kuchhal, principal, Artha Venture Fund.

Research shows that 59 per cent of customers purchase unnecessary items through BNPL that they otherwise couldn't afford. "High late and returned payment fees are the main disadvantage for the industry. According to a report by OkCredit, purchases in segments like apparel and jewellery using BNPL show higher incidents of non-payments because of higher ticket sizes," she added.

The countries comprises largely youth, who have huge needs and desires. However, they don't often have the income levels to match up to fulfil all the aspirations. This mismatch is pushing them to opt for BNPL, giving way to instant gratification, but debt later.

"BNPL helps to improve the overall shopping experience of customers and increase turnover for merchants but many potential BNPL users might not be eligible for loans due to being new to credit or other underwriting criteria of such companies. BNPL companies are also exposed to credit losses and collection risks," said Ankur Bansal, BlackSoil. Experts feel that BNPL promotes unsustainable discretionary spending behaviour.

Further, along with RBI crackdown, there is a also a threat for startups of lenders developing or adding their own BNPL layer.

In July last year, the Reserve Bank of India said that said that the BNPL model needs to be examined. It said that guidelines should be framed for this new product in lending.

"This channel, facilitated by a few payment aggregators, leverages the existing nodal account (escrow account after authorisation) to route payments between a BNPL customer and a merchant. This novel method shall be examined, and issuance of appropriate guidelines on payments involving BNPL shall be explored," said the central bank in its Payments Vision 2025.

Experts also feel that once regulatory mechanisms are put in places, banks will move towards building their own BNPL solution. This is a trend that is already being seen in many countries.