BNPL is the flavour of festive season | Economic Times

Top consumer internet companies, including Flipkart, Amazon, Paytm and Byju's, are betting big on India's nascent, yet fast-growing Buy-Now Pay-Later (BNPL) segment ahead of the upcoming festive season.The premise is simple: millions of Indians who took to online shopping amid the Covid-19 pandemic – many without credit cards – are opting for interest-free credit at checkout points on online platforms, and facilitators – mostly fintech firms such as Zest Money, Simpl, Lazypay, Pine Labs and Capital Float -- are willing to underwrite the risk.Industry insiders say the size of India's annualised BNPL market in gross transaction value terms has grown to around $1.5 billion-$2 billion in less than 18 months, from just a few million dollars in 2019, aided by the behavioural change induced among shoppers following the virus outbreak. Flipkart is facilitating such transactions through subsidiary Flipkart Advanz, while Amazon has partnered with non-banking financial company Capital Float. Paytm is offering BNPL as part of its Postpaid service in a tie-up with Aditya Birla Finance. In the ed-tech space, Byju’s and Unacademy have partnered with Lazypay and Capital Float, respectively.Meanwhile, private sector banks themselves are experimenting in this segment.ICICI Bank is offering pay-later services on its app, while Axis Bank-owned Freecharge has also forayed into the space.According to industry tracker Tracxn, there are 33 BNPL-focussed startups in India, a mix of fintech NBFCs and payment service providers functioning as platform facilitators. Up to July, the sector had seen a total funding inflow of around $17.7 million in India, against $11.6 million, $48.5 million, and $19.1 million worth total funding in 2020, 2019 and 2018, respectively, as per Tracxn data. 85195256“At the moment, we are financing two million purchases a month, and in the run-up to Diwali we expect the disbursement to double,” said Gaurav Hinduja, MD and cofounder of Capital Float, an NBFC with specialised focus on BNPL. “The demand is largely coming from three sectors apart from our e-commerce tie-ups – travel, ed-tech and direct to consumer brands.”The trend has been seen across small towns and corner shops selling high-ticket goods such as mobile phones and electronic items and not constrained only to purchases at bigger outlets in metros.Business ModelOn the backend, these transactions are enabled through network integrations between retail marketplaces, merchants and financiers. The model is prevalent both on offline outlets, where Pine Labs and Bajaj Finance are among the leading players, as well as online stores.Typically, they are “form-agnostic” and can be enabled after the customer's credentials are authenticated at the checkout point. Hypothetically, such transactions can be done without any payment instrument, using just an ID card. Moreover, the repayment contracts are flexible, depending on the credit scores of customers.“The ticket size of a loan is as low as Rs 500 and as high as Rs 60,000 - basically attracting all kinds of customers,” says Bhavesh Gupta, the chief executive of Paytm Lending. “These are typically customers that traditional financiers have deemed risky because of sparse underwriting information and where economic value doesn’t add up as the ticket sizes are small.” As per industry insiders, the typical model would involve a financier tying up with a merchant and a platform through a fixed transaction fee model. As there is no interest rate, the facility is offered to customers with a Merchant Discount Rate – or a transaction service rate – of around 1.5%. In some specialised models, a subvention rate regime also kicks in where a part of the interest rate is taken on by the merchant or the fintech platform.The fintech companies typically rely on SMS data and credit scores to gauge income and repayment rates for underwriting. A loss is typically taken on the books of the NBFC. While the default rates of BNPL in India is not in public domain, as per sources, the industry bounce rate hovers between 15% and 20%. Regulatory AmbiguityWith the growing traction of BNPL, industry insiders told ET that it could attract the attention of banking regulator, the Reserve Bank of India, especially around disclosures on loan products as well as marketing as a payment service, rather than as a credit product.“Most licensed NBFCs in India that are in the BNPL business are treating it as a short-term unsecured loan product,” said an industry executive requesting anonymity. “However, marketing the product as a payment service rather than a credit facility dilutes borrowers’ responsibility to pay back. Moreover, BNPL facilitators must complete KYC checks to onboard customers. Currently, there are no standardisations in the industry as the space is nascent.”In recent months, central banks in the UK, Malaysia, Sweden and Australia have examined the regulatory scope for supervising the BNPL segment in their respective jurisdictions – as a credit service, even as many are offering the facility as a “budgeting” alternative.This has come amid massive funding and investments backing the segment globally.US-based Square, the digital-payments platform led by Twitter founder Jack Dorsey, recently agreed to buy Australian BNPL company Afterpay in an all-stock deal worth about $29 billion.