How we shopped yesterday is not how we shop today; how we spent yesterday is not how we spend today, because consumer behaviour and spending patterns have changed drastically over the years, with massive shifts in the way consumers transact. This paradigm shift has in turn seen the rise of the Buy Now, Pay Later.
The Buy Now Pay Later, or BNPL as it has come to be used, is a powerful tool that supplements consumerism boom, with the aim of providing a digital credit card experience and brings into its fold even those left outside the structured financial system. Developed to cater to the underserved and unserved section of the population and the new generation that’s geared towards instant gratification, Buy Now Pay Later isn’t limited only to that; it is rather open to all, thereby unlocking previously untapped opportunities for consumers, merchants, and
While the idea behind Buy Now, Pay Later is to do away with the tiresome approval processes of conventional lenders, that often dissuade consumers, there could be a possible flipside to BNPL if lending companies don’t follow proper rules and guidelines stated by the Reserve Bank of India.
What’s the flipside?
Fintech lenders like FlexPay/Vivifi offer BNPL as credit product, ensuring there is credit reporting, but there are companies that use BNPL as payment product where credit reporting does not happen. This kind of an approach creates a gap when evaluating a consumer for other loans and often leads to misinterpretation of the customer’s actual pay burden by other potential lenders, causing the customer to be over leveraged when approved.
As a credit product, FlexPay/Vivifi ensures the consumers’ positive payment behaviour is reported too – when the consumers make a payment or don’t make a payment, both need to be reported to the credit bureau. But when most other companies don’t practice the same, it leads to bad performance not getting reported, resulting in the customer, who is probably already over leveraged, taking more loans to make payments and consequently, falling into a debt trap; and from a lender’s standpoint, you probably are extending credit to someone you should not be extending credit to.
What could possibly be wrong with BNPL?
It is the lender’s responsibility to ensure proper process is followed before lending credit, which include taking the customer’s data, checking their bank statements, their KYC, getting their PAN number and identification. This helps to establish that the consumer is one who he says they are; then evaluate their credit burden, and lend them an appropriate amount. If fintech players fail to comply, the result is overleverage/ overburdening as already discussed.
Furthermore, when the customer stops paying, the RBI’s prescribed code of conduct for collections need to be followed. But companies that do not treat BNPL as a credit product may not be following this code of conduct, leading to customer harassment, involvement of third party collection vendors, who may cross the line, due to lack of proper monitoring.
What should the consumers look out for?
Firstly, for a consumer, protection is paramount, so when downloading apps, make sure that the app is from a lender who is a licensed lender. If a company is not holding RBI license, it should clearly state under whose license it is offering the product. Before downloading, check who is publishing the app, take a look at the company’s website and make sure it is an established and registered company in India.
Secondly, if the company is licensed, check if it clearly mentions the same on its website, along with the RBI guidelines that it follows, including the grievance redressal mechanism and the interest rate policy. Moreover, never download apps which ask for contacts as they may be misused for coercion.
Thirdly, most BNPL options claim no fees or zero interest, but you need to understand what is the real cost of the loan. Even if companies say zero per cent, they are supposed to declare their IRR – Internal Rate of Return, so the consumers, for their own protection, need to make sure that the company or the app is disclosing all of these.
A powerful tool
BNPL is not meant for every purchase a consumer wants to make or for everyday expenses, because that would mean over leveraging yourself.
However, when managed correctly and responsibly, the fact that instead of making all the payment today or using a credit card to buy, you are actually getting an opportunity to buy a product almost at the same price and break it down into 4-5 payments, is an extremely powerful tool to have.
This is the advantage that BNPL companies offer and that’s why there’s explosion in adoption because the consumers understand it and need it. With caution on the consumers’ part and responsibility from the lenders’ end, Buy Now Pay Later is a perfect, frictionless payment solution.
The author is CEO & Co-Founder of Vivifi India Finance