Updated: Jan 11
In the past couple of years, the online shopping landscape has undergone tremendous shifts, changing the way eCommerce functions. Customers have turned to online shopping even for daily essentials, and small-value orders and eCommerce is fast becoming their predominant channel of purchasing. It is in this context that ‘Buy Now Pay Later’ (BNPL) is swiftly gaining widespread popularity as the preferred mode of payment for online purchases, forever changing how online shopping occurs. This technology-enabled micro-credit lending model is disrupting the credit ecosystem across the globe in general, and in India in particular. Globally, BNPL is estimated to grow to around $4 trillion by 2030, based on a report by Allied Market Research. In India, the Global Payments Report highlights BNPL as the fastest growing online payment method, expected to capture 9% of the market’s spending pattern by 2024 from the current 3%.
Factors Driving A Rise In The ‘Buy Now Pay later & Interest-Free’ Model BNPL as a payment method has been around for some years. However, several factors have enabled the meteoric rise of BNPL Interest-Free in recent times. The COVID-19 Pandemic and Change in Consumption Patterns
The pandemic caused cataclysmic shifts, with many people either having to take a pay cut or getting laid off. This uncertainty in income has restricted the purchasing power of customers and shifted consumption patterns more towards essentials and consumer durables. BNPL thus became an attractive alternative to customers who now focused more on savings. According to industry insiders, the gross transaction value of the BNPL market in India increased to around $2 billion in under 18 months post the beginning of the pandemic as compared to a handful of millions in 2019.
Demographics-related purchasing power
A significant segment of users of BNPL Interest-Free are Millennials and Gen Z. Being tech-savvy, the ease of use of this payment method, often powered by technology, appeals to them. Further, the ease of access is also making this mode popular in Tier II and Tier III cities as well as rural areas. Moreover, as most of them are just starting their careers, this payment option allows them to increase their purchasing power without going into debt.
An important contributing factor for the rise of BNPL Interest-Free is the enlarged size of the eCommerce industry and its future growth prospects in India. Impetus on securing digital infrastructure both by the government and private players has increased eCommerce penetration which currently stands at 7% of the retail market size in India. Estimates predict that it will reach around 11-12% by 2026. Growth cannot happen in a silo and a near-doubling of eCommerce penetration must be accompanied by a supporting change in how business is done, and BNPL is just one of the many ways by which eCommerce brands can attract and retain new customers.
The Benefits of ‘Buy Now Pay later Interest-Free’ to Customers
BNPL Interest-Free improves customer experience by increasing payment options and providing consumers with choices in terms of payment. Additionally, it also offers other benefits such as 1. Being Interest-Free: For many consumers, zero-interest is the most appealing feature of BNPL as it allows them to make not only essential purchases but also aspirational purchases. The worry of high interest rates is eliminated and it allows them to balance their budgets for the month smoothly. 2. Instant Processing: Consumers do not have to wait for weeks for approval, instead the processing of credit is instantaneous and hassle-free. Credit is approved on a real-time basis and the chances of rejection are low compared to obtaining credit cards or personal loans. 3. Flexibility: Payments can be made in a flexible manner irrespective of the value of the goods. This increased flexibility in not just the mode of payment but the terms of payment is hugely beneficial to consumers who can now make purchases instead of shelving them due to credit crunch, or due to the lack of a credit card. 4. Transparency: Unlike credit cards with hidden fees, BNPL models are more transparent regarding their charges and upfront regarding terms of payment. This reduces apprehension with respect to the use of such lending modes. 5. Accessibility: Several consumer segments lack access to credit including the self-employed and the informal workforce. They are not preferred by formal credit lending agencies due to credit score and underwriting issues. This huge section of consumers can now benefit from credit made easily accessible through BNPL Interest-Free mode. 6. Increased Purchasing Power: Given the ease in accessibility, BNPL Interest-Free enables higher purchasing power for consumers particularly during festival seasons. One survey found that 48% of consumers felt BNPL would enable them to purchase up to 20% more when compared to credit cards. Further, it also comes in handy for emergency or unexpected purchases. Under this payment scheme, it is easier for consumers to purchase high-value appliances and gadgets as well.
‘Buy Now Pay later Interest-Free’ - How It Works
BNPL is a short-term financing solution that allows customers to pay for purchases in flexible installments instead of paying the entire amount upfront. Installments can be made interest-free within a given period of time. For example, the payment platform Sezzle provides for four installments over six weeks. Various BNPL lending platforms have set the upper limit at INR 60,000 currently. Another option within BNPL zero interest is the deferred payment alternative wherein the entire amount can be deferred for a certain number of days, generally ranging from 15 to 45 days. LazyPay, for example, allows people to pay in fifteen-day windows for purchases made during that time period. This particular offering is for purchasing lower-value goods such as apparel and consumer electronics below INR 25,000. The focus of LazyPay is on convenience, while that of Sezzle is on ensuring that large purchases can be made without too many commitments. In India, BNPL is also offered through several other platforms such as Simpl and Razorpay. This phenomenon is further bolstered by leading banks, for example, ICICI PayLater and fintech companies such as Paytm entering into the market.
What it Means For eCommerce Brands
Since the consumer is not being charged a fee, brands need to bear a transaction cost instead. Platforms like Razorpay and Simpl currently charge 2% of the transaction value, which brands are expected to pay. Usually, most brands will find that the cost of holding their inventory and risking it turning into dead stock is often much higher than the transaction fee being imposed. Post-pandemic, several consumers are looking to spend less in one go, and BNPL Interest-Free is an excellent way to sell high-value items. BNPL addresses gaps in the traditional lending and borrowing landscape by making credit available instantaneously without the need for underwriting. The onboarding process can be completed within minutes and requires minimum details. Most of the customers get instant approval. At the same time, it also improves customer experience by facilitating faster check-outs as payment can be made in one tap without additional steps such as entering OTP details. In this way, BNPL can be used multiple times across various online shopping platforms and the pending dues can be cleared in one go, usually once in 15 days.
Summing It Up
The ‘Buy Now Pay Later’ trend is still in its nascent stage in India, and this gives eCommerce brands a unique opportunity to differentiate themselves from the competition. This payment method is particularly valuable for brands selling to younger people living not just in Tier-I but also in Tier-II cities across India. Such synergy between customer needs and eCommerce flexibility, especially in a country as large and diverse as India, can become an excellent driver of growth for eCommerce brands.