The growth of the Buy-Now-Pay-Later (BNPL) industry in 2022

Today, Millennials and Gen Z are turning money conscious to be in control of their borrowings and expenses.

Buy Now Pay Later (BNPL) — with its core principles of customer-centricity, cost efficiency, and transparency towards credit — has attracted a growing segment of young demographic customers. 

A rapidly-growing shopping option, BNPL permits consumers to defer payments towards their product purchases to the end of the billing cycle. The short-term funding solution splits the repayments into flexible instalments, typically without interest, for payments made within the credit period.

Based on service providers’ schemes, buyers can make payments with varying credit periods, comprising a month or even over 12 months.  

But BNPL credit limits vary depending on whether the offering is interest-free or with interest. Zero-interest BNPL offers usually between Rs 1,500 and Rs 25,000 — mostly meant for small-value transactions, typically towards essential items and frequent purchases.

BNPL providers focus on the convenience factor — with instant approval for purchases made rather than on the credit facility or the quantum of credit offered. The credit risk is limited to a small duration as the complete payment must be made on the due date, which can vary from 15 to 45 days.

‘With-interest’ BNPL offerings provide a credit between Rs 25,000 and Rs 100,000+, meant for buying high-value goods. In such cases, the credit amount offered along with the convenience element forms the fundamental intent. The repayment cycle of goods sold through interest-based EMIs varies from one to three months or even over 12 months. 

Tailwinds and growth opportunities

Considering only a minuscule 3.33 percent of India’s 900 million registered bank customers hold credit cards, BNPL has tremendous scope to leverage the untapped potential for credit.

BNPL players are well placed to fill this void since the country’s low credit card usage is attributed to apprehensions about high-interest charges and hidden fees. 

Sensing its burgeoning popularity, a few leading banks have also forayed into this space. Interestingly, while credit card caps can extend to many lakhs, BNPL offers a maximum credit limit of Rs 100,000 or close. Quite evidently, each product has its niche and targeted customer segments.

Incidentally, banks have begun pitching BNPL products to consumers who prefer to avoid using credit cards owing to its high penal charges and annual fees. 

They are teaming up with payments behemoths, offering pay-later facilities within stores to retail customers. Consumers can opt for high-value purchases through this and split the payments via monthly EMIs. 

Against the backdrop of the COVID-19 pandemic, the BNPL option has given consumers more flexibility while shopping without worrying about high-interest charges associated with credit cards.

Despite a sunrise sector, according to Redseer’s estimates, India’s BNPL market is expected to soar from the current $3-3.5 billion to reach $45-50 billion by 2026. In fact, it predicts that BNPL users would expand to 80-100 million during this period.

Likewise, Goldman Sachs expects BNPL to become the fastest-growing online payment avenue, with market share crossing 9 percent in 2024, up from the 3 percent at present. 

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From fringe to mainstream

The COVID-19 led lockdowns nudged millions of people to embrace digital modes for shopping. For many, it was their first point of engagement with digital payments. The response has been positive with merchants and users showing trust in BNPL.

These developments have permanently altered consumers’ shopping habits and behaviour. Considering its small ticket sizes, BNPL is slated to find greater acceptance in Tier II and III regions. 

Thanks to the Digital India mission, BNPL, a concept initially limited to the US and Australia, is well-poised to steadily become an integral part of India’s mainstream payments model.

For small-town retailers, this digital evolution from the ancient Khaata (account) system, offered to their regular or loyal customers, provides a roadmap for faster and greater growth. The rising acceptance is partly due to its transparency and relative ease of usage. 

Undoubtedly, technology has emerged as an excellent growth catalyst for shoppers and retailers. While shoppers can meet increasing aspirations with safety and convenience, retailers are presented with an excellent opportunity to drive deeper penetration in the untapped non-metro zones.

The opportunity for retailers is particularly relevant in the case of consumer cohorts from hinterland geographies, who remain reluctant to share their bank account or card details during purchase transactions. 

Multiple tailwinds will keep pushing greater BNPL penetration. For example, after lockdown restrictions were lifted in 2020, small and medium enterprises could leverage this cashless credit model. BNPL EMI offerings could be availed at offline stores through PoS (point of sale) devices.

In this way, a formal micro-lending product is available to consumers in an informal manner, devoid of the lengthy loan protocols of conventional banks. 

The success of this model in increasing the sales traction of both small-ticket and big-ticket goods is noticed even by ecommerce platforms, resulting in the introduction of pay-later services during the 2020 festive season, which spurred their sales. 

There is no doubt that ecommerce transactions are bound to grow, correspondingly benefitting the BNPL sector. According to a Deloitte report, the BNPL share in India’s retail market, now pegged at 7percent, will reach 11.4 percent by 2026. Taken together, these factors establish the buy-now-pay-later model is poised to transform the lending landscape in India.