Can Pay Later leapfrog Credit Cards in India? : A BNPL Deep-dive
BNPL is red-hot right now. Globally, it has seen massive deals like Square’s acquisition of Afterpay for $29 billion, PayPal’s acquisition of Paidy for $2.7 billion. In India, we see players like ZestMoney and CapitalFloat raising $50 Million each, BharatPe launching PostPe, Pine Labs planning to go public and many early-stage FinTechs raising funds to fuel Indian BNPL ambition.
We are not exaggerating when we say that 4 new large players with deep pockets have entered the BNPL industry in India since we started reading up on this topic (and no we are not lazy, okay maybe a little). The hype is supported by the growth numbers. Different estimates peg that BNPL will see anywhere between $250B to $1Tn in gross transaction value by 2025(They are on track to do $100B in 2021), outpacing the overall growth of e-Commerce by a huge margin. It means that it will cut into share of some of the other established payment formats of Credit Cards or Wallets. With these growth numbers — we are all set to witness a big competition between new entrants, neo-banks, and established financial services providers (Banks and NBFCs). When we looked closely we realized BNPL is under the covers just another uncollateralized debt instrument, that in most cases uses alternate data.
So why is a product that isn’t entirely new and has existed in different formats, taking the world and India by a storm? Read below to find out the answers and more about the landscape for BNPL Internationally, different operational models, and what we think is going to be the future of Indian BNPL. Let’s go 🚀 🚀
All starts at a Startup Competition — Global Domination
In 2005, Sebastian Siemiatkowski and two of his friends started Klarna as an after-delivery payment product. Customers would make purchases and Klarna would pay the merchant on their behalf while customers had 14 days to pay back Klarna. Merchants loved it for the increase in conversion rates as more people were ready to spend and customers were just happy to have the convenience and credit. Soon Klarna was able to get traction and even VC funding which help them grow in Europe and other markets including the USA.
In 2012, Max Levchin, co-founder of Paypal, along with three other co-founders started Affirm. The idea was to allow users an option to pay for their transactions with 4 installments at 0% APR — dubbed as microloans at checkout.
In 2014, Nick Molnar in Australia has a similar idea. He very strongly believed that millennials had an aversion towards credit cards cause of the potential of compounding debt and the hunch was right as today roughly 50% of BNPL users in Australia are millennials — with Afterpay alone having over 3.4 Million Active Users at the end of 2020.
These three companies now command a market cap of ~$100B*. Valuations are justified by the crazy growth numbers BNPL is able to show. Today BNPL accounts for 2% of the Global e-Commerce transactions but for top markets like Sweden and Germany, the number is close to 20%, 10X in comparison to the global average which shows how much potential is packed in this simple product. A bunch of factors (of course including the pandemic) are contributing to this growth engine, more about them later
*based on current stock price, sale price, or valuation as per the last round of funding
Khata Mein Likh do — The Indian Story
Most of us (or at least our parents) have been to a Kirana (grocery) store and possibly uttered the phrase “Bhaiya, Khata Mein Likh do”. The store owner just takes note of the purchase and gives a consolidated bill at the end of the month. The primary reason was increased convenience and the trust developed. We have been doing this “Buy Now Pay Later” at the end of the month, for a lot of years now (one more thing the world learns from Indian traditional Businesses 💁🏻).
As the Fintech lead- BNPL global wave began Indian entrepreneurs were quick to respond and the first pure digital BNPL PLayer to launch in 2015 was Simpl. They took a mobile-first offering approach to allow users to borrow money across multiple merchants and allow them to clear dues in 15 days as a part of a single unified bill. The next couple of years saw a lot of other players come in with a similar model — ZestMoney, Lazypay, FlexMoney, etc. Slowly a bunch of NBFCs and Large Banks also started to come up with their own offerings in the space — Paytm Postpaid, HDFC Bank FlexiPay, etc. New models also started to emerge — E-Commerce players started to come up with their offerings either as a part of their Financial Services Arm — e.g. Ola Money or in Partnership with other NBFCs — Amazon Pay Later + Capital Float.
India presents a unique opportunity with an estimated 20% CAGR in E-Commerce between 2020–2025 and a strong mobile-first user base which so far has been largely attracted towards Cash on Delivery as a trustworthy payment option. During the Great Indian Festival 2021, the usage of Amazon Pay Later surged ~10X. Flipkart’s Pay Later accounted for the second-highest share of payments after paid orders, even higher than the Unified Payments Interface (UPI) as a preferred mode of payment.
Let’s look at what has been really clicking for customers who are adopting BNPL to make small and big purchases👇.
Why is everyone talking about BNPL?
Just like the ‘Khata System’ BNPL brings solves three key customer problems: Access to credit, affordability, and convenience.
1. Access to Credit: Out of 90 Cr Indians who use banking services, only ~3 Cr are unique credit cardholders i.e only 3.33% of Banked Indians have easy access to credit. Needless to say, not having access to credit puts a lot of things out of reach — the ability to afford medium and big purchases. It’s an endless loop — without enough credit, users can’t build up their credit score, and without high enough credit scores, loans get more unattainable.
So when a company comes along, saying, “Here’s money for that smartphone you wanted, pay us back in two weeks,” without credit score checks or the hassles of applying for credit cards, it’s a big attraction for the consumers. Most BNPL companies offer you anywhere between 2k-50k INR to start you off with minimal documentation requirements and let your increase your limits for good repayment history. By reducing the friction of getting started on their Credit Journey, BNPL is allowing a lot of people to be able to use credit for their benefit.
2. Affordability: One of the popular features of BNPL products has been “Pay in 3/4”. This allows customers to make medium-large ticket purchases and payback in 3/4 Installments at a very low or Zero Interest rate. This has been a bit hit with BNPL users, a large percentage of whom now refuse to shop at merchants where similar options are not available. This feature is a big hit for merchants as well as they have seen an uptick in Average order value (AOV) and cart conversion rates.
While EMI has always been an option provided by Banks, this feature is a boon for those who are underbanked and don’t have access to Cards or are just unhappy with services of traditional banking alternatives.
3. Convenience: Payments have become an important part of user experience in the overall e-commerce purchase journey and impact customers’ likelihood to make a purchase. BNPL has been able to improve the experience by providing easy one-click checkouts and consolidated bills. It has also been able to bridge the trust deficit which prompted a lot of customers to choose the COD option by allowing hassle-free refunds for returns. When we combine these features with arguments of affordability, the BNPL proposition becomes very strong and lucrative even for folks with a credit card.
However, it’s not all rosy and nice. BNPL critics claim that BNPL schemes might attract people with financial difficulties and fraud might be rampant. We have to wait and watch for a few months before we start getting in reports of NPAs for the Indian Players (We doubt it’s going to affect their next fundraise)
BNPL players don’t come in one single vanilla flavor, in our next section we discover the different types of BNPL Players and how they operate.
Operating models & Players: Crowded but huge opportunity
These BNPL offerings vary wildly. The credit amounts can range from as little as Rs 2,000 to a general upper limit of Rs 50,000, where customers have to pay back the sum in one go or in installments. Repayment periods also differ — from two weeks to as much as a month. A delay in repayment can lead to late payment charges of up to Rs 100 per day. These BNPL are essentially a digital lending arrangement between a fintech firm and a non-banking financial company, bank, or any other regulated entity. The fintech firm acts as a sourcing agent and a front-end for customers, while the actual lending happens from the balance sheet of the RBI-regulated lenders like banks or NBFCs. The FinTech firms also manage everything from KYC to the collection of ‘loans’ from the user.
Before we move on, Let’s take a step back to the Debit/Credit Cards world.
As you know, almost all our cards are issued mostly by either VISA, MasterCard, or RuPay. Now, what VISA or MasterCard has done is, they have developed a huge network of merchants, which accept payments via a VISA or MasterCard credit/debit card.
Now, let’s enter the BNPL world. Think here of BNPL as a payment option. Now, it can either join an existing network like Visa, MasterCard, or even UPI or create its own Network. When creating its own network, it can either serve huge merchants like Amazon, Swiggy, Zomato where they get huge volumes and an established network, or create a network of small merchants who are ready to accept this BNPL solution. As you might be guessing it right, distribution and unit economics is the key when you are creating your own network.
Let’s understand all this one by one in detail:
1. Partnering with Visa/UPI: Join Existing Network
For BNPL companies, this seems a very lucrative proposition as they don’t have to put the effort into acquiring merchant partners, and they get ready-made access to a huge network. In India, two types of BNPL on network exists:
BNPL on Visa, MasterCard:
The biggest issue which BNPL players face is onboarding merchants as compared to credit cards. Simply as Credit cards get huge access to networks via VISA or Mastercard or Rupay.
Similarly, Startups like Uni, Slice and BharatPe have solved for that by using VISA as a network provider and extending a line of credit on top of that — BNPL. The credit issued is obviously by an NBFC partner. The best part is, here you can either get 1% cashback or get the flexibility of paying over 3 or more installments.
BNPL on UPI (Scan and Pay):
We all know, UPI is just exploding and its acceptance rate all over India is just awesome — almost every merchant now accepts UPI. So, a few players like Freopay, Bullet by Jupiter, BharatPe decided to ride on this!
They allow customers to borrow instantly by just scanning a QR code. While the facility is fast gaining acceptance, UPI credit operates in a regulatory grey area i.e it’s not legal or illegal right now.
Interesting Note: BharatPe’s PostPe uniquely married both Visa and UPI networks, which inherently gave them access to a huge network, and they are giving a credit limit from 2K to 10L with 1–5% cashback on each spend, making it a very promising product to look out for!
2. Partnering with Merchants: Create your Own Network
When BNPL tries to create its own network of merchants, it brings itself a lot of challenges in distribution but opens up new types of business models. 4 types of models exist here:
EMI-based Model:
BNPL platforms like Pine Labs, Bajaj Finserv, ZestMoney issues a credit limit to the user, generally at the Point of Sale (POS) and the user has to pay interest on the purchase amount for a specific tenor. They generally have high ticket purchases and offer up to Rs. 1 Lakh for an extended period.
Mom & Pop Stores drive 85% of India’s retail and it is hard to get EMIs outside of Mobiles & appliances segments. No easy, digital way exists for the ‘offline’ merchants to offer an EMI. Paytail has come up with an innovative solution in a huge offline retail market — they enable merchants to allow credit limits upto Rs. 2 Lakhs across both brand and non-branded EMIs. Their realtime decision engine has interesting data inputs like — quick loans via multiple API calls, Invoice Upload with real-time OCR Scan, Price verification through QR Scanning etc.
Deferred Payments Model:
In this, the BNPL platform like LazyPay, ePayLater, Simpl partner with the Merchant/Brands like Zomato, Bookmyshow and take a commission of 5–10% of the order value. The user doesn’t pay any interest amount unless they miss the deadline when they have to pay a late fee. This is the most popular, globally followed by firms like Affirm, Klarna, (the original type of BNPL model) as it increases order value, sales, and loyalty for merchants and increases convenience and affordability for the consumers. They generally have small ticket sizes, but the frequency is quite high. It also allows for the “Embedded BNPL” model for merchants, where they can simply add these services and provide an option to its user base.
Simpl is now closing in at 4500 merchants across India and a key distribution partnership with Razorpay has allowed Simpl to onboard 1500 new merchants in just the last 3 months. It has currently ~7 million users and has facilitated over 45 million transactions between customers and merchants.
ePayLater is solving a unique problem of retailers who can’t afford to get easy short-term credit as 85% of the credit cards is with salaried individuals. Small Kiranas also needs access to interest-free capital — just like distributor’s credit but Kiranas deals so much in cash that it doesn’t have a paper trail to get credit from formal sources. ePayLater is trying to solve this by applying BNPL here — they give suppliers the cash they need in advance and earn commissions from suppliers and later collect from the retailers. This way suppliers get increased sales as much as 174% and instant cash. The defaults rate at ePayLater is 0.15%, which is quite impressive.
Another interesting player in this segment is Sezzle, a US-based BNPL giant which entered India, and is offering to split into 4 payments just like they did in the US.
White-labeled Model (Hybrid):
In this, the BNPL platform only provides its technology platform to merchants and brings lenders and brands on the technology platform. With this model, Brands can design their own BNPL product with the Lenders (NBFCs like Capital Float) and distribute the product to the merchant network on the platform.
Amazon Pay Later and Flipkart’s Pay Later are major examples here. For instance, Flipkart offers different limits based on customers’ profiles. On the backend, this credit is offered by IDFC Bank at 11.5% per annum. As a consumer, we don’t have to pay this interest rate, as it’s borne and discounted by Flipkart. Flipkart is bearing this cost in a hope that they will have increased sales due to this, which may easily outweigh this cost.
Wallet-based players:
Recently, two companies are going/went public — MobiKwik and Paytm and both had two major pitching points — MobiKwik Zip and Paytm postpaid. MobiKwik’s flagship BNPL product, Zip is an interest-free product with a ₹500 to ₹ 30,000 credit limit available in the user’s MobiKwik Wallet with a one-tap activation in 15-day cycles. At the end of the cycle, a user is required to pay the due amount within five days, failing which a late fee is charged. The user also pays a one-time activation fee.
Potential Entrants:
Heavily funded Neobanks like Niyo, Fi, and Credit card startups like Slice, CRED are well-positioned to enter the BNPL market. Their major push towards BNPL will be the revenue opportunities. As many FinTech companies have garnered huge traction, but very few have unlocked major revenue drivers, and BNPL or Lending can be that key.
Not only this, India’s biggest banks are already testing this arena — HDFC Bank’s “FlexiPay” and ICICI Bank’s “PayLater” among others.
Business Model of BNPL
For BNPL companies, there are two main identified revenue streams:
- Merchant fee for integrating BNPL service. They are generally taking a fee (1–5% of the Gross Merchandise Value) from e-commerce companies for the increased sales
- Late fees & processing charges directly from Users
To generate these revenues they end up spending on:
- Cost of Operations — Building the tech product, Hiring Space, Premium Zoom Account, etc.
- Cost of Marketing/Customer Acquisitions — Costs linked to advertisements, promotional offers, bringing merchants onboard, etc.
- Cost of Financing: Pay interest to their lending partners (NBFCs/Banks)
The BNPL players typically position themselves as:
1. Payment product (Focus on Increased convenience)
BNPL players, who are more like payment products (Simpl, Lazypay) acquires users directly from the merchant network at the point of sale resulting in low efficient Customer Acquisition Cost (CAC). While they see a huge growth & volume with high stickiness, the profitability and unit economics are not impressive here as the ticket size is too small.
2. Credit product (Focus on Affordability and access to credit)
For BNPL players who are more like Credit products (ZestMoney, Pine labs) follow the similar revenue and cost model, but here the Interest revenue also forms a good chunk, as they have a higher ticket size, leading to much better unit economics. But they lack one thing, the frequency or stickiness is low!
At the end of the day, Payment Product is looking to increase their Ticket size, while Credit Products are hunting on more transaction volume!
Also, an interesting point to note is, while some BNPL players like Paytm PostPaid, ZestMoney do proper credit checks as well report to credit Bureaus, many don’t, and in fact, it may be one of the key value propositions to a user who isn’t serious about BNPL bill payments.
One of the biggest challenges faced by BNPL is credit decisions — which users should be allocated credit, and how much? BNPL players try to use a variety of behavioral data from merchants, or their own platform to detect this credit limit, hence creditworthiness but lack of alternate data sources is still a major challenge of BNPL.
Future of BNPL:
In BNPL, the Indian industry is a few years behind Europe and USA. But the starting point is too different with India being traditionally a credit-starved nation. In fact, with such a low penetration of Credit Cards, BNPL can have a true opportunity to leap-frog Credit Cards and adopt digital solutions, the same way mobile phones leapfrogged landline penetration.
At the current growth rates, we see companies focus on scaling up acquiring customers and merchants, and new entrants coming in to serve different types of customers. . As the dust settles we predict that major E-commerce players have their own BNPL solutions and a few large general-purpose lenders remain. We may see companies with deep pockets to acquire tech and fin players to improve their offerings.
In 3–5 years, we can also see massive consolidation to happen in India as the industry matures like the US, where Square bought Afterpay for $29 Billion i.e Big Giants will acquire BNPL niche players to extend their offerings and leverage BNPL’s network & users.
Large Financial institutions can benefit by acquiring BNPL players for:
- Their relationship with Merchants — this can be leveraged to offer more products
- Integrating with own apps where you can improve the experience of existing users as well as grow your users base — both by inorganic direct addition of user followed by growth due to a new better offering
If not acquired, they are also happy partnering as they are getting a huge number of users from players like Flipkart, Amazon.
From a regulatory standpoint, RBI is constantly changing regulations like ‘Not allowing companies to store Credit Card & Debit Card data by 2022’ which means, a user has to enter manually his 16 digit number each time he makes a payment. This might actually prove BNPL’s demonetization moment as BNPL’s biggest pitching point — convenience (one-click checkout) becomes much much stronger here. On the flip side, RBI is coming up with norms to kill unregulated digital lending players and they have also recommended treating BNPL as a credit product, which means they have to do proper bureau credit reporting, which can eventually impact a few startup’s growths in new-to-credit customer.
Managing risk will also be crucial, as the player who is able to underwrite risk more efficiently will be a winner in the long run.
We will see a lot of marketing pitches that come in as a new-age startup trying to sell the old wine of credit in the new bottle of Pay Later!
- Take an Education Loan or “Study now, Pay Later”
- Take a Travel loan or “Travel now, pay later”
- Take a Wedding Loans or “Wed now, Pay Later” (We are not kidding, a YC startup — Maroo is actually making Wed Now Pay Later in the US)
Phew, that’s a lot of words. Hope you enjoyed it and learned a thing or two.
If you have any queries/suggestions or just want to have some interesting conversations around FinTech/startups, we would love to connect — Naimil Shah and Yash Agarwal
