Digital Indians are enamoured with Buy Now Pay Later credit

Photo: iStock
Photo: iStock


BNPL is a credit product, and it is best delivered in a regulated format with controls

After two decades of innovation in financial services in India, one statistic stands out in its lack of scale—the number of unique credit card holders. At approximately 25-30 million, this figure has been long surpassed by everything from debit cards and e-commerce to WhatsApp and UPI users.

In contrast, the US has more than 1 billion credit cards, with over $3 trillion in outstanding limits. Credit cards are woven into the everyday fabric of life and consumption, totalling a staggering $1 trillion of spends each year.

But over the past few years, a new kid on the block has been giving plastic a serious run for its money. Buy now pay later (BNPL) has risen to prominence over the past five years, offering shoppers simple ways to pay for online purchases in multiple instalments. It has grown rapidly since, becoming the fastest-growing payment instrument globally. In India, BNPL is just starting to take off, riding on the rapid growth of e-commerce—accelerated by the pandemic—and a growing millennial consumer base. But while BNPL sought to disrupt credit cards in the West, in India it represents a unique opportunity to leapfrog into an entirely new digital-first paradigm to enable small credit for the retail consumer.

More than 75 million consumers who actively shop online in India today do not have a credit card. These customers are underserved by formal credit, yet they are data-rich and digitally-active. Typically between the ages of 25 and 40, they are a mix of salaried professionals and small business entrepreneurs. Their first port of call for a product or service is typically online. As they navigate these choices, aspiration vs affordability becomes the key balancing act in day-to-day household purchase decisions.

At the same time, this is the target market that merchants and brands are hungry to tap into. By offering credit—contextually —at the point of checkout, BNPL can significantly increase conversion and average order value by over 2X for these merchants.

BNPL in India now looks to be at a tipping point. A combination of factors—e-commerce growth, millennial purchasing power, credit card underpenetration, digital finance rails— is driving this phenomenon. As this market opportunity deepens, what will it take to win at BNPL?

Technology: A big part of BNPL’s customer appeal is its simplicity. It allows consumers to split the value of their purchases into multiple instalments payable over a period. Pricing is transparent—either zero cost or interest bearing to the customer. Designed to transform the shopping experience, BNPL integrates payment and credit in a one-click option at checkout. Delivering this experience requires significant technological agility behind the scenes.

Strong risk management: BNPL is, at the end of the day, a credit product. It is best delivered in a regulated format, with controls such as proper KYC (know your customer) and credit bureau reporting in place. Strong underwriting policies, portfolio monitoring, repeat behaviour and efficient collections are key to getting loss rates and unit economics right.

Interestingly in India, BNPL has been one of the best-performing credit products through covid, an otherwise difficult period for the lending industry. Industry best-in-class cohort loss rates in India for BNPL are currently at 1.5-2%. Collection efficiencies even through lockdowns have remained around 95% for such products.

Ultimately, risk management will be the long-term moat for successful BNPL players in India. This stems from the unique opportunity to build a repeatable business around the 75 million+ customers who don’t have a credit card today but increasingly shop online. The game is just beginning. BNPL represents only 3% of e-commerce GTV in India today, a market projected to grow at 30-40% CAGR over the next 5 years. But beyond financing e-commerce, BNPL represents an even larger opportunity to build a broader financial services play for the next frontier of customers, and become a one-stop-shop for all their financial needs.

Sashank Rishyasringa is managing director and co-founder, Capital Float.

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