Buy now, pay later (BNPL) services are exploding in popularity among Indian consumers, especially younger demographics. BNPL allows customers to purchase products immediately but spread payments over interest-free installments. This emerging industry is projected to grow tenfold in India by 2025.
The Rise of BNPL in India
BNPL took off in India around 2016 when companies like LazyPay, Simpl, ZestMoney and Slice began offering the payment method. Adoption accelerated during the COVID-19 pandemic as more commerce shifted online and consumers sought financial flexibility.
The BNPL market in India is currently valued at $3-3.5 billion and is dominated by LazyPay, with over 5 million users. However, many new players are entering this high-growth space. According to RedSeer Consulting, India’s BNPL industry will reach $35-40 billion by 2026 as more customers embrace digital payments.
Key Drivers of BNPL Growth in India
Several factors are fueling rapid BNPL growth in the Indian market:
- Digital payments growth: Rising smartphone penetration in India has allowed digital payments services like wallets, UPI and mobile banking to thrive. Over 70% of India’s online shoppers now use digital payment methods, compared to less than 40% five years ago. This familiarity with instant digital transactions makes adopting BNPL easier.
- Financial inclusion: A significant portion of India’s population does not have access to traditional credit cards. BNPL provides a new way for such underbanked consumers to access interest-free credit, with more flexible eligibility criteria. Approval rates for BNPL tend to be much higher than credit cards.
- Younger demographics: Millennials and Gen Z value flexibility, instant gratification, and digital-first services. 75% of BNPL users in India are under 35. Younger earners are digital natives who are highly comfortable using apps and fintech services. BNPL aligns perfectly with their lifestyle.
- High ecommerce growth: BNPL has been integrated into popular Indian online shopping platforms like Flipkart, Myntra, Nykaa and others. This allows frictionless use of BNPL payment options while checking out. India’s ecommerce market is expanding at 20% annually, giving BNPL startups a thriving channel for user acquisition.
- Attractive to merchants: BNPL can increase average order values by 40% or more compared to other payment methods. It also improves conversion rates due to lower friction. With BNPL, merchants receive payments (minus fees) right away, unlike cash-on-delivery. Leading merchant categories adopting BNPL include electronics, fashion, beauty, furniture and travel.
How BNPL Services Operate in India
BNPL providers in India partner with banks, NBFCs and ecommerce players to offer interest-free credit at checkout. Key business models include:
- Integrated model: Platforms like LazyPay and ZestMoney have built their own lending infrastructure including credit decisioning, payments and debt collection. They take on risk themselves.
- Marketplace model: Simpl partners directly with online and offline merchants to embed BNPL credit options. Merchants receive payments upfront minus Simpl’s fees. Simpl bears risks.
- Bank partnership model: Slice partners with banks and card networks like Visa for backend financing, payments processing and debt collection. Risk is shared between partners.
To qualify for BNPL financing, consumers generally need to complete a basic KYC profile and pass initial eligibility screening based on minimal criteria. Credit limits are low initially but increase progressively with good repayment history.
Benefits and Risks of BNPL
BNPL is popular for several reasons:
Benefits of BNPL
- Increased purchasing power and flexibility: Customers can buy more expensive items than they can afford upfront and pay later in installments. Promotions like 30 days interest-free make this even more attractive.
- Interest-free, predictable payments: BNPL plans in India have fixed EMI schedules, unlike credit cards with revolving balances and accumulating interest. Consumers have payment certainty.
- Fast and easy sign-up and approval process: Mobile apps and a few basic details are all that is needed. Higher approval rates than traditional credit makes the hurdle minor.
- Improved budgeting compared to credit cards: Structured installments with a defined end help consumers manage budgets better and avoid “minimum payment” traps.
- Access to credit for underserved consumers: Those without credit cards can use BNPL to build positive credit history and graduate to higher credit limits.
Risks of BNPL
- Potential for overspending and unmanageable debt: The ease of BNPL can lead consumers to overspend. Multiple parallel BNPL plans make finances opaque.
- Late fees if installments are missed: While interest-free, BNPL loans levy hefty late fees, similar to credit cards. This erodes savings from BNPL.
- Negative impact on credit scores if delinquent: Missed BNPL payments affect credit bureau scores, impairing ability to get future loans.
- Lack of transparency in some billing cycles: Certain BNPL plans have vague repayment schedules or prepayment conditions that confuse users.
- Limited purchase protection compared to credit cards: BNPL providers offer less coverage for issues like damaged goods, disputed transactions etc.
Industry Concerns and Regulatory Response
As BNPL grows, regulators are monitoring risks. Concerns include reckless lending, hidden fees, data privacy and incompatible policies across platforms.
In 2022, the RBI released recommended guidelines:
- Standardized late fees and credit reporting protocols to protect consumers
- Disclosure of long-term costs to consumers to increase transparency on total costs
- Interoperability across provider apps/platforms to avoid vendor lock-in
- Governance of consumer data access rights to build trust and prevent misuse
A BNPL regulatory framework is expected by late 2023. This will address stakeholder concerns while continuing to encourage financial innovation.
Future Outlook
The BNPL industry still has enormous headroom for growth in India. Potential developments include:
- New entrants from fintechs, banks and international BNPL firms: The attractive opportunities will draw more players.
- Integration with digital wallets and modern payment rails like UPI: This will expand use cases for BNPL, including for micro-transactions.
- Adoption by additional ecommerce verticals and in-store retail: Categories like groceries, quick-service restaurants and gas stations could offer BNPL.
- Evolution of hybrid BNPL-credit card products: Banks may offer cards with BNPL features to engage younger consumers.
- Increased financial literacy around responsible BNPL usage: Educational campaigns can help mitigate risks of over-borrowing.
As consumer comfort with digital finance increases, BNPL will likely play a key role in India’s booming payments landscape. Regulatory oversight will be critical to ensure sustainable industry growth.
Conclusion
BNPL has tapped into surging demand for flexible digital payment options among Indian consumers. Attractive economics for merchants and lack of credit access for many buyers is fueling exponential growth. However, prudent regulation will be needed going forward to balance innovation against risks. The future trajectory of the Indian BNPL industry will depend on how well providers and regulators collaborate to develop frameworks that protect consumers while expanding access to modern financial services.