Will the 'Buy Now Pay Later' model kill credit cards in India?

In India, where the number of credit cards is on a steady fall, the ‘buy now pay later’ (BNPL) model is making inroads. Youngsters, who are wary of using credit cards and paying interest and late fees, are increasingly being hooked online by e-commerce majors and a slew of start-ups with easier payment modes that involve barely any cumbersome documentation.

Is the relatively new concept of BNPL killing the traditional payment modes like instant pay and credit cards?

Difference between BNPL and credit card

The key differentiator for BNPL vis-à-vis the credit card is a more customer-friendly approach and transparency. The BNPL players levy a late-fee on missed payments compared to the exorbitant interest rates on missed credit card dues.

The growth in the BNPL market replicates a similar pattern in several developed countries such as Australia and European Union. It allows consumers to seek a short-term micro-lending facility for your quick purchases online. The ‘indulge-now-and-pay-later’ facility, with a little or no interest on the deferred payments, works on the merchant fee, a vital revenue stream, and late payment fee from customers.

Bigger threat for credit cards

Interestingly, the Covid-19 pandemic that rendered many jobless has created a fertile ground for the BNPL model in India.

A recent Nomura report says the BNPL model could be a bigger threat for credit cards, as it provides the necessary credit solution in a more effective manner (such as no-cost EMI), and make it easier for e-commerce players to leverage their large customer bases.

While several pureplay BNPL start-ups have already caught the imagination of the youngsters, banks such as ICICI Bank and HDFC Bank have also ventured into the relatively new territory with their own products — ICICI PayLater and FlexiPay, respectively. The leading BNPL start-ups include Lazypay, Simpl and Zestmoney.

Ecommerce sites offering BNPL services

The ecommerce giants such as Amazon and Flipkart are also offering their BNPL products. Industry officials said the launch of Amazon Pay Later and Flipkart Pay has helped them immensely to boost sales on their respective platforms. Fintech and payments companies such as PhonePe and Paytm have also stepped into the BNPL space. Ola, a leading ride-hailing aggregator, is offering its customers its own BNPL facility, Ola Postpaid.

Nomura believes that the existing BNPL models face some key challenges in the country. “Setting up an acceptance network and enrolling merchants is a tedious task. Also, for a better acceptance rate among merchants, one needs to have a large customer base. What will also impact the BNPL model is the higher cost for merchants compared to the traditional card payments and higher credit risks compared to credit cards, where credit decisions can be backed by better data-driven risk models,” said the report.

Some industry officials believe that the evolution of BNPL which largely catered to a non-carded customer base can aid market expansion rather than threatening the credit card industry.