What is BNPL?

Tanisha Sabherwal
Tanisha Sabherwal
August 6, 2021

The definition of BNPL is very variable. Some call it small installment loans, others as a digital financing service and some as an invoice-based buying. While people may argue if this is either a type of convenience or affordability, the CEO of Capital Float says both. Looking at the userbase of these segment, both credit card holders and users without access to a credit-line use the service.

This short-term micro credit model is very similar to how our nearest merchants at grocery stores register in a 'Khata' (to build customer trust) and the customer pays back the total amount at the end of the month.

Traditional Credit vs BNPL

  1. BNPL is ideally for smaller ticket sizes and mandatory credit history is not required. Some of these smaller ticket sized might not be reported back to bureaus that might hide indebtedness of consumers.
  2. It follows a low-pricing model unlike other credit models.
  3. Easier approvals for BNPL and extensively used by e-commerce platforms or merchants which deal with high-frequency products.

Why is BNPL on the rise in India?

India has a low credit card penetration, 3% according to Inc42 which is very low when compared on the global level. This is a cycle, customers not having credit, lead to inability to buy goods and merchants facing the music and leading to low sales. Hence, more and more merchants are enabling BNPL to increase their sales by allowing customers to take credit on checkout. Another possible reason could be that the merchants in India always build trust with customers for high customer stickiness and increase in revenue.

Credit Limit offered by BNPL companies

Credit Limit offered by BNPL companies

Interests and Costs

  1. No-cost BNPL: There is no charge for the consumer and the fee is borne by the merchant for revenue and customer stickiness. The fee is very less in India, around 0.75-5%. Most of the BNPLs are no-cost.
  2. BNPL with interest: The remaining BNPLs are with interest and borne by the consumers for convenience. They have the ability to split the fee into EMI.

How do companies identify the credit limit?

According to Capital Float, they consider multiple data points to identify the credit limit, which includes:

  1. Credit history from bureaus.
  2. Income estimation models from various data points.
  3. Consumer score from merchants like Amazon, Flipkart etc.

Repayment cycle provided by BNPL companies

Repayment cycle provided by BNPL companies

How do companies offer BNPL?

  1. Outsource a lending institution or NBFC.
  2. Lend from their own resources.

More than a payments business, it is a lending business. Therefore, companies need to be extra cautious of the defaulters and other discrepancies.

The BNPL model is on the rise in India but now players have also started offering both deferred payment method (with zero interest rate) and EMI option (low interest rate) in order to attract both small ticket as well as large ticket size customers.

Resources: India Fintech Diaries, Inc42, BankBazaar