GD Topic: Buy Now Pay Later (BNPL): A convenience or a trap

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Latest update- Buy Now Pay Later Schemes Halted By Fintech Firms After RBI Scrutiny
Many fintech firms have stopped the buy now pay later (BNPL) services after a recent Reserve Bank of India notification. The new guidelines, issued by the RBI last month, stopped non-bank prepaid payment instruments (PPIs) from being loaded with credit lines. Read more about this development in the article below.

Buy Now, Pay Later, popularly known as BNPL is a type of short-term financing that allows consumers to make purchases and pay for them at a future date, often interest-free. The recent rise of BNPL culture can be accounted to the pandemic. With the increased demand for e-commerce services due to lockdowns and consumers preferring to break down large expenses into smaller interest-free EMIs, BNPL has become a popular option. While ‘Buy Now, Pay Later’ offers many conveniences, it is still a loan that consumers need to pay! In India, quite a few online merchants and fintech companies are offering BNPL facilities to customers as a convenient payment method. However recent RBI guidelines have but a roadblock on many of these offerings. Read this MBAUniverse.com article to understand all about BNPL financing. This is an important GD Topic for MBA and other entrance exams as it involves consumers, banking and regulation. Let’s get started. 

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What is BNPL Payment?
BNPL also known as Buy Now Pay Later is a payment option where you can make a purchase without having to pay the full amount at the time of purchase. Typically, you sign up with a company providing this facility who makes the payment when you make the purchase. However, once the lender pays on your behalf, you will have to repay the amount within a specified time period. When compared to a personal loan, generally no interest is levied under the BNPL scheme. You can either pay it as a lumpsum amount, or you can pay it via no cost Equated Monthly Instalments (EMIs). If you fail to pay the amount within the given repayment tenure, then the lender will be liable to charge you interest on your amount. Further delay could impact your credit score. 

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How does BNPL work?
Here's how BNPL usually works:

  1. Customer make a purchase at a participating retailer.
  2. Opts for the ‘Buy now, pay later’ option.
  3. Makes a small down payment of the overall purchase amount and completes the transaction.
  4. The remaining amount shall be deducted in a series of interest-free EMIs.
  5. The payment of EMIs is made via bank transfer, cheques, credit card, debit card or directly from the bank account.

Advantages of BNPL
Some of the benefits of BNPL are:

  • Increases affordability
  • Instant access to credit
  • Safe and secure transaction
  • Can choose repayment tenure
  • No cost EMI
  • Simple process

Disadvantages of BNPL
Some of the problems associated with BNPL are:

  • Lack of transparency. Sometimes consumers are not aware that bank loan has been taken in their name.
  • Undue promotion of consumerism
  • Undue loans and debts on citizens

Difference between Buy Now Pay Later and Personal Loan
Some of the main differences between BNPL and personal loans are mentioned below:

BNPL
Personal Loan
Generally, maximum loan offered is Rs.1 lakh
Maximum loan offered may be more than Rs.25 lakh
Only secured loans are offered
Secured and unsecured loans are offered
Generally, no interest is levied on the principal amount
Interest is levied on the principal amount
Typically, BNPL tenure is up to 90 days
Tenure of up to 60 months may be provided

Difference between Credit Card and BNPL
There are certain differences between credit cards and the ‘Buy Now, Pay Later’. Let us take a look at them:

BNPL
Credit cards
Generally, BNPL follows a transparent and low-cost pricing model
Hidden charges are levied on credit cards
It is not mandatory to have a credit history
You must have a good credit history to avail a credit card.
BNPL services/facilities are provided by select e-retailers and fintech organizations
Credit cards come with more flexible acceptance
Interest – free credit period can go up to 48 months
Credit cards come with a standard interest-free period
You have to pay the fixed EMI on the scheduled date
You have the option of paying only the ‘minimum due’ amount

BNPL players in the Indian Market
Banks such as Axis Bank, Kotak Mahindra, ICICI Bank, etc. are offering the BNPL facility to their customers. Some of the leading specialized BNPL players in the Indian Market are:

  • Bajaj Finance
  • Amazon Pay Later
  • Ola Money Postpaid
  • Paytm Postpaid
  • ZestMoney
  • LazyPay

How does BNPL companies make money?
BNPL makes money from both sellers and consumers. In case of sellers, they pay BNPL a fee ranging between 2% and 8% of the purchasing amount if the customer uses the BNPL facility. BNPL players also make money from customers by charging an interest on delays ranging between 10% and 30% based on their credit score, repayment tenure, etc.  

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Latest update - Buy Now Pay Later Schemes Halted By Fintech Firms After RBI Scrutiny
Many fintech firms have stopped the buy now pay later (BNPL) services after a recent Reserve Bank of India notification. The new guidelines, issued by the RBI last month, stopped non-bank prepaid payment instruments (PPIs) from being loaded with credit lines. The central bank's move comes amid rising concerns over card-based credit services and PPIs being loaded through credit lines.

 

According to the RBI, the new credit instruments could result in systemic risk. The new-age fintech firms are using lines of credit from banks and non-banking financial companies (NBFCs) to load customer wallets. The bank regulator is apprehensive about a lack of due diligence while loading the PPIs through credit lines.

 

The new RBI guidelines, issued on June 20, have sent the fintech companies into a tizzy and many have temporarily stopped prepaid instruments. According to the new directive, non-banking companies cannot offer credit cards or other PPIs without the prior approval of RBI. However, the customers can load their pre-paid wallets with cash or use credit and debit cards issued by their banks for the same.

 

Fintech firms have requested a clarification from the RBI as the new guidelines have caused a disruption in the industry, especially adversely affecting small players.

 

Fintech startup PayU India's lending platform, LazyPay, has temporarily discontinued its buy now pay later product LazyPlus UPI. Online credit service platforms Jupiter, EarlySalary and KreditBee have temporarily halted all transactions through their prepaid cards. Slice and Uni also have restricted issuances of new credit cards after the RBI directive, the ET report mentioned quoting sources.    

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