BNPL players hawk nearly $8 billion in credit to a wide swath of society

Who has seen tomorrow? If you hold this worldview, then you are an ideal buy-now-pay-later (BNPL) customer. “It’s to short-term consumer financing what sachetisation was to fast-moving consumer goods,” says Yogi Sadana, chief executive officer of CASHe. The idea is not new: Deferred payment options have long been around.

What’s different is that instant gratification has gone digital and is within easy reach for those who are new to credit. BNPL players have hawked nearly $8 billion in credit to a wide swath of society that would otherwise have had to be content with window shopping.

“The BNPL market may eventually be targeted by banks. But the larger point is that for now, we are expanding the retail consumer finance space to an entirely new segment,” says Nitin Gupta, founder and CEO of Uni. Backed by Lightspeed Ventures and Accel India, it is one of the few fintechs that raised a large seed round of $18.5 million in October 2020.

It is offering “Pay 1/3rd”, which allows you to convert to “Pay in Full”, at the end of the 30-day free-credit period, and also enjoy a one per cent reward in cash-back. Piloted in June 2021, the fintech claims to have 50,000 customers, with more than 200,000 app downloads, and hopes to have on board a million customers within a year.

“BNPL is the most popular option for those who seek smaller loans instantly to fulfil their cash needs. We anticipate a rise of 25-30 per cent during this festive season,” says Bhavin Patel, CEO and co-founder of LenDen Club. The biggest winner in all of this is going to be the customer. Scarcity has long plagued Indian society and this sudden surge of new-age financing options, led by BNPL, has the average Kumar and Kumari spoilt for choice.

“By indirectly incentivising banks to pay attention to the needs of the underbanked, BNPL could even go as far as bringing institutional credit down to every nook and corner of the country, a feat that was all but impossible to accomplish even a few years ago,” notes Sadana. A look at some numbers yields a fuller appreciation of what exactly is happening.

Targeting the missing middle

There are nearly a billion debit cards in circulation, but only about 65 million credit cards. And of all this plastic, debit accounted for 94 per cent, while the share of credit cards was a mere six per cent. Reason: One may get the sense that it is easy to get a credit card issued, but a whole lot of folk simply do not qualify for one — blame it on their lack of, or poor, credit histories. And few will also go on record on this one — credit bureau data tends to be static; once you have been red-flagged, to get waved in again is tough.

That said, even on credit cards, there has been an exponential uptick in transactions. According to the latest report by the Paris-based Worldline — a payment and transactional services company — the number of credit card transactions at point-of-sale (PoS) terminals was 280.29 million in the last quarter of 2020-21; on e-commerce platforms, it was 244.24 million.

In terms of value, Rs 904.49 billion was processed at PoS terminals; it was Rs 1.07 trillion for e-commerce. “It would be worth watching how this growth will pan out in the coming quarters,” the Worldline report observes, in a reference to the second wave of the Covid-19 pandemic.

There is a huge appetite for consumption outside the ambit of credit cards and bank retail loans. BNPL players have hooked into this segment, and primarily improve the customer’s personal finance cash flows at no added cost. This precedes the need for credit and better checkout experience for the customer. BNPL players are, quite simply, in a sweet spot.

They are largely digital non-banking financial companies with credit lines from banks. Some are peer-to-peer (P2P) lending platforms like LenDenClub, the largest in the country. “We disburse within two hours. When a borrower contacts a P2P platform, their profile is available on the site, unlike legacy banks and financial intermediaries,” says Patel. But this raises a question: If BNPL offers such easy pickings, why are banks not zeroing in on it?

This has to do with the way banks are structured. They take deposits, and clever lending can land them in trouble with a ripple effect on depositors and the wider financial system. And unlike in-store BNPL where sales representatives can way-lay shoppers with offerings, banks cannot afford to have boots on the ground, saddled as they are with the need to maintain branches and all manner of compliance costs. 

Another matter of detail: BNPL players have private equity money to burn and play the valuation game. Look at Cred, which helps consumers pay credit-card bills easily and win rewards; it also has Cred “Cash”, which offers an instant credit line at 12-15 per cent or thereabouts. Founded by Kunal Shah, it raised $251 million last week in a Series-E round from Tiger Global Management and Falcon Edge Capital, valuing the company at $4.01 billion. On a relative-book-size basis, Cred is more valuable than many domestic banks!

Will the binge last?

“BNPL has to be seen in conjunction with e-commerce play. It will have a huge multiplier effect on the economy,” says Gupta. Look at it another way — a majority of top-of-the-line banks now have an almost 50:50 split between their corporate and retail books. This is, in part, due to the fact that corporate loans have been under heavy stress. But it’s also highly probable that retail banking could come under pressure in the wake of the pandemic.

HDFC Bank’s bad-loan write-offs doubled to Rs 3,100 crore in the April-June quarter (first quarter, or Q1) of 2021-22, from Rs 1,500 crore in the corresponding period of 2020-21. What about BNPL firms who hawk credit to many consumers who would not have been worthy of it? Do remember: Consumer finance of this nature is nothing but cheap unsecured money.

“We ensure that our customers are genuine. A robust credit-evaluation algorithm is incorporated on our platform to consider various financial, social, and personal factors to ensure that borrowers are franked thoroughly,” notes Patel. Of course, it is to the credit of BNPL firms that they have integrated artificial intelligence and machine learning technologies while ensuring high returns, thus capping dud loans at less than 4 per cent.

According to TransUnion, the retail credit industry in India is worth $612 billion and has been growing at 18 per cent a year over the past three years.

The interesting bit is that while there has been a 90 per cent recovery in bureau enquiries (from players who are seeking to lend) after the pandemic, there has been a three-fold growth in consumers checking their credit scores from 2018 onward. Folk tend to check their credit scores only when they actually need it, and such last-minute efforts may hamper the credit experience.

Given the nature of BNPL as a business with customer acquisition happening instantaneously — be it in-store, or online — it makes sense to check the score regularly. And this need has spawned the likes of OneScore. Unlike credit bureaus and aggregators such as Paisabazaar or a Bankbazaar, which offer only credit scores, it claims to offer detailed and customised insights.

“If there are variances in the credit history of an individual, it will impact the credit score. We not only identify discrepancies that an individual may not be even aware of, but also give personalised, curated insights that explain their causes. An individual can also report about an incorrect score through the app,” points out Anurag Sinha, CEO and co-founder of OneScore.

Though less than two years old, the platform has close to 7 million users, and recently raised $10 million from Matrix Partners, Sequoia Capital and other angel investors. 

As for the question, who has seen tomorrow — well, nobody has. Until then, you can buy now and pay later.