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How BNPL Startups Are Disrupting India鈥檚 Lending Space, for Better or Worse - YouTube
Channel: Backstage With Millionaires
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if you've bought anything online recently then聽
you might have noticed the option to buy now and聽聽
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pay later and this is becoming pretty prevalent聽
across e-commerce websites and apps but you might聽聽
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have even noticed this option being offered in聽
offline locations too like stores and malls and聽聽
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for a lot of people this option is really really聽
useful because normally you'd have to save up聽聽
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you'd have to put money away every month until聽
you could afford that shiny new expensive thing聽聽
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that you want to buy and nobody wants to do聽
that especially if it's on sale right now and聽聽
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maybe won't be in a month or two we want things聽
today we want to buy them now and pay for them聽聽
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later and historically the solution to this聽
problem was a line of credit or a credit card聽聽
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but of course in india getting a credit card isn't聽
always an easy process and once you've acquired聽聽
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one well then you're being charged all kinds of聽
fees and there are interest payments to make too聽聽
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suddenly you're in debt and if you're not careful聽
that debt can take a long time to get rid of聽聽
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so either way the situation up until this point聽
hasn't been great either you save up for months聽聽
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or you go into credit card debt and聽
that's where buy now pay later comes in聽聽
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often shortened to just bnpl and the npl startups聽
are taking the allure of paying for things later聽聽
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the same way that you would with a credit card and聽
they're making it easy simple and straightforward聽聽
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and earlier i mentioned shiny new expensive聽
things smartphones laptops tvs but bnpl聽聽
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is starting to become available for everyday聽
items too things like groceries and clothes and聽聽
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even restaurant food zomoto and swiggy are聽
offering bnpl as an option now too and these聽聽
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kinds of use cases for bnpl are actually a major聽
source of competition right now for traditional聽聽
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players in the credit space to the point where the聽
predicted number of bnpl users in india by 2026聽聽
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is a hundred million that'll be almost seven聽
percent of indians by 2026. now currently in聽聽
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2022 credit card users account for a little聽
more than two percent of india's population聽聽
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that's just 30 million credit card users which聽
is still more than double the current number of聽聽
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bnpl users at 10 to 15 million but that number聽
is increasing rapidly and so in this video we're聽聽
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going to be exploring the why of that why is this聽
happening why is bnpl seeing such rapid adoption聽聽
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and will this be the end of credit cards聽
here in india let's find out right after this聽聽
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so if you haven't already figured this out bnpl聽
and credit cards are actually very similar in the聽聽
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idea and concept of what they're offering credit聽
cards are essentially buy now pay later cards聽聽
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and bnpl is a form of credit it's not a聽
credit card but it is a loan it's debt in聽聽
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both cases you're borrowing money from a third聽
party be it a bnpl startup or more likely the聽聽
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financial institutions that they've partnered聽
with or a credit card provider usually a bank聽聽
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the big differentiator here though between credit聽
cards and bnpl is in their execution so if you've聽聽
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ever applied for a credit card here in india and聽
especially if you own a credit card then you've聽聽
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probably gotten a call or an email from a bank聽
salesperson telling you that you're eligible for聽聽
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a new card congratulations now of course what's聽
happening here is that your phone number which聽聽
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is tied to your identity is now in circulation聽
across most of the financial institutions in聽聽
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india and probably a couple of scammers too but聽
it's a very real possibility that if you decide聽聽
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to actually try and get one of these cards your聽
application will be rejected despite the fact聽聽
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that the salesperson told you otherwise and that's聽
because in india getting a credit card is rarely聽聽
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as easy as the sales people make it out to be聽
you have to be above a certain age there's an聽聽
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income threshold that you need to cross which also聽
means that you need a job with a proper pay slip聽聽
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and you'll probably need to have a good credit聽
score too which makes it especially difficult聽聽
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for new entrants into india's credit market people聽
living in remote parts of the country because they聽聽
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might not even have a documented credit history聽
and the same thing goes for students or people who聽聽
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have just started in the workforce as an intern or聽
they're on a fresher salary and these measures are聽聽
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taken by credit card issuers to protect themselves聽
they're avoiding defaulters people who they聽聽
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feel are too high of a risk basically they're聽
keeping their npas their non-performing assets聽聽
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low by setting a high bar for their customers聽
but once you are a customer once you've actually聽聽
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acquired a credit card well the struggles and聽
challenges don't stop there because now you聽聽
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actually have to pay for your credit card some聽
credit cards have annual charges just to own the聽聽
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card it's like a subscription but for the ones聽
that don't there are of course interest charges聽聽
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which can be exorbitant and then of course聽
there's also usually a myriad of fees for聽聽
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things like going over your credit limit paying聽
your minimum late and advancing cash from your聽聽
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credit card to your bank account so taking all聽
of this together all of these barriers to entry聽聽
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and all of these pain points for customers it's聽
really no surprise that a lot of indian people聽聽
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don't want credit cards they're a headache and聽
if credit cards are a headache then buy now pay聽聽
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later might look like a ceredone or a discipline聽
startups like slice zest money simple lazy pay and聽聽
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uni are lowering the bars that credit card issuers聽
have set so high pretty much anybody can buy now聽聽
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pay later here in india and all you need to do聽
is provide details like your pen and other number聽聽
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instead of relying on credit scores these bnpl聽
providers use their own algorithms to determine聽聽
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how much credit they should give you based on聽
your transaction history and your location and聽聽
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once you've been a bmpl customer for some time聽
and as long as you've been in good standing and聽聽
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you've paid off your loans they'll increase your聽
credit limit too now another factor that's worth聽聽
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considering is the timeline credit card companies聽
expect you to decide when to pay off your debt聽聽
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they give you a minimum amount that you need to聽
return to them at the end of every month plus聽聽
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interest of course but beyond that it's up to you聽
to pay off your debt and a lot of people struggle聽聽
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with that autonomy they end up paying their聽
minimum without actually making much of a dent聽聽
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in the principal the initial loan amount before聽
interest charges with bnpl though credit repayment聽聽
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is dispersed over a fixed period of time usually聽
a couple of months through a system called emis聽聽
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or equated monthly installments and as long as you聽
pay these installments every month your bnpl debt聽聽
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will be gone after a fixed period of time now does聽
this mean that bnpl plans come without interest聽聽
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well yes and no it really depends on which聽
platform which bnpl company you're borrowing from聽聽
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oftentimes the longer the tenure of the loan the聽
higher the interest rate becomes if you opt for聽聽
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a short term bnpl tenure of say between 15 and 45聽
days which gives you enough time to receive your聽聽
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monthly salary and if you pay this loan on time聽
then you probably won't end up paying any interest聽聽
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you've basically just stretched out a payment that聽
would have been upfront and instantaneous over a聽聽
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multi-week time period but if you opt for a longer聽
tenure say between three months and a year well聽聽
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depending on a number of variables your interest聽
rate could be somewhere between 10 and 30 percent聽聽
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but this is made clear up front so that bnpl聽
customers understand that this is the cost聽聽
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of spreading their payment out over an extended聽
period of time credit card companies on the other聽聽
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hand give you the liberty to dig a deep deep hole聽
for yourself one transaction made on credit here聽聽
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another there and then suddenly you're struggling聽
to make your minimum payments every month and your聽聽
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debt keeps on growing as your interest compounds聽
so bnpl seems like the clear winner here right聽聽
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it's a form of lending that understands people聽
that's tailored to their needs right well that's聽聽
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the narrative that bnpl startups want you to hear聽
but let's take a closer look to try to understand聽聽
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how these businesses actually function how are聽
bnpl startups making money we'll start off with聽聽
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the end customer the one who will be buying now聽
and paying later and they're buying this item from聽聽
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a merchant who could be an offline merchant maybe聽
a store owner for example or an online merchant聽聽
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maybe a d2c company or an ecommerce marketplace聽
then we have the bnpl provider and they're the聽聽
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ones who are providing the technology here they're聽
assessing the end customer using their proprietary聽聽
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algorithms and deciding how much to loan them聽
but this loan isn't actually coming out of their聽聽
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own pockets at least not most of the time instead聽
these bnpl companies have partnered with financial聽聽
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institutions either nbfcs non-banking financial聽
companies or fully-fledged banks so now finally聽聽
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we have the full picture the end customer the聽
merchant the bnpl facilitator and the bank or聽聽
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nbfc now before we move ahead i do need to clarify聽
some things because that diagram is simplifying聽聽
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things a little bit and it's not always quite聽
as straightforward as that diagram makes it seem聽聽
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yes sometimes you do have this straightforward聽
structure where the bnpl provider is mainly聽聽
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focused on just that offering buy now pay later as聽
a service and we mentioned some of these companies聽聽
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earlier slice zest money simple lazy pay uni but聽
this isn't always the case sometimes the bnpl聽聽
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company is an nbfc and this is just one of their聽
many product offerings and sometimes they're a聽聽
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fintech company paytm and moby quick for example聽
offer bnpl and sometimes the bnpl provider is also聽聽
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the merchant flipkart or amazon have their own聽
proprietary bnpl services for example so i just聽聽
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wanted to clear that up and make sure that we're聽
all on the same page here and now let's move on聽聽
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to the next question how do bnpl companies make聽
money well there's actually a couple of sources of聽聽
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revenue the first comes from merchants like credit聽
card companies and pos providers bnpl companies聽聽
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charge merchants anywhere between two and eight聽
percent of the purchase amount now the merchant聽聽
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is okay with this because of the benefits that聽
they see from partnering with the bnpl provider聽聽
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firstly they see an increase in conversions and聽
average transaction value because customers that聽聽
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probably wouldn't have been able to afford big聽
ticket items in their store or marketplace now can聽聽
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so basically tying up with a bnpl company gives聽
merchants more customers who spend more money and聽聽
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the best part is that they don't actually shoulder聽
any of the risk here the bnpl company pays them聽聽
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right away on behalf of the customer so those聽
monthly emis that the customer is paying聽聽
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don't go to the merchant the merchant has already聽
been paid in full instead the end customer pays聽聽
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the emis to the bnpl company who is taking all of聽
the risk in their hands but what happens if the聽聽
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end customer can't keep up with these monthly emis聽
well that's where the second source of revenue聽聽
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comes in because many bmpl companies charge late聽
fees according to bank bazaar these fees can be聽聽
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a percentage ranging from anywhere between two聽
and eight percent of the principal loan amount聽聽
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or according to business today they can also be聽
a flat fee somewhere between zero and 750 rupees聽聽
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usually sort of like a slap on the wrist to try聽
to get these borrowers to pay up now it is worth聽聽
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noting here that some bnpl providers don't charge聽
late fees and the way that they protect themselves聽聽
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from defaulters is to start small they first offer聽
a loan amount that they can afford to lose and聽聽
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then if the customer pays them back they slowly聽
increase that customer's credit limit if a payment聽聽
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is late then that customer's ability to continue聽
buying things via that bnpl platform is shut off聽聽
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and the customer's credit score will also take a聽
hit and then of course the third source of revenue聽聽
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is interest charged on longer 10-year bnpl聽
loans and we already covered that earlier so聽聽
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let's move on now to some of the issues that this聽
market is facing and there are a lot of them and聽聽
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they're pretty big too see there are many indian聽
bnpl customers that don't even know what a credit聽聽
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score is they don't realize that by failing to pay聽
off their bnpl debt on time they're irreversibly聽聽
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damaging their financial identity they have no聽
experience in the lending space they've never聽聽
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been a customer of a lending company and this is聽
where we start to run into problems because as聽聽
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i mentioned earlier bnpl providers make it really聽
really easy to get a loan even for people with no聽聽
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financial experience and very little in the way聽
of financial self-control some of these people聽聽
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unfortunately have the potential to go off the聽
rails spending more money than they can afford to聽聽
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pay back later without even realizing it of course聽
bnpl players know this and their argument is that聽聽
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these are still early days they don't have a lot聽
of data to work with because credit penetration is聽聽
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so low in india and so they're building models聽
they're slowly amassing this wealth of data on聽聽
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first-time indian borrowers and as they gain聽
more insights they're tweaking their formulas聽聽
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experimenting with first-time borrowers by giving聽
them small loan limits to start off with and then聽聽
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offering bigger loans to trustworthy borrowers and聽
flagging untrustworthy ones in other words they're聽聽
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doing the groundwork required to illuminate the聽
financial trustworthiness of a large untapped聽聽
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subset of india's population it's almost like a聽
public service or at least that's how they would聽聽
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frame it of course customers especially ones聽
who aren't technologically or financially savvy聽聽
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don't care about these models this bird's eye聽
perspective means nothing to them when they聽聽
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find themselves unexpectedly in a sea of debt聽
wondering how a seemingly innocuous buy now pay聽聽
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later platform got them there and wondering why聽
nobody will give them a loan to pay off their聽聽
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other loan because their credit score which they聽
didn't know they had has now entered the red they聽聽
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panic and in some cases they lose hope of ever聽
escaping the debt trap that they've fallen into聽聽
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this though of course isn't something that聽
bnpl companies are going to slow down for聽聽
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at least not without government intervention聽
in fact things are only getting more heated in聽聽
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this space as more and more venture capital is聽
being pumped in to buy now pay later startups聽聽
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to stay competitive bnpl companies need to onboard聽
as many customers as possible by either making聽聽
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inroads into previously untapped populations聽
of people in remote parts of the country or by聽聽
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poaching customers from competitors by offering聽
them even easier loans and this has resulted in聽聽
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a situation where with a shockingly small amount聽
of paperwork and no proof of income to speak of聽聽
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you can comfortably apply for bnpl from four or聽
five different platforms and borrow upwards of one聽聽
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lakh rupees there are even instances now of bnpl聽
companies not doing proper kyc or credit bureau聽聽
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checks they're growing so fast that they're unable聽
to scale their due diligence and there have even聽聽
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been reports two of defaults not being reported聽
to credit bureau agencies frankly things are a聽聽
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little bit out of control right now in india's聽
bnpl space corners are being cut and in the聽聽
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absence of any proper regulations unauthorized聽
lending platforms are beginning to spring up聽聽
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for example earlier in 2021 there was a flurry聽
of chinese lending apps that were using customer聽聽
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data and phone permissions to harass and humiliate聽
customers into paying back loans at extreme daily聽聽
[826]
compounding interest rates after an investigation聽
the rbi found that out of 1100 lending apps in聽聽
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india 600 were illegal and while these definitely聽
weren't all bnpl apps these 600 illegal apps聽聽
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are a symptom of a larger problem right now聽
in india's lending space a throwing of caution聽聽
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to the wind by lenders and loan facilitators in聽
favor of growth at any cost so coming back to one聽聽
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of our original questions here will bnpl overtake聽
credit cards in india in terms of market adoption聽聽
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yes that is almost a given at this point the low聽
barrier to entry for customers and the allure of聽聽
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being able to bridge the gap between affordability聽
and aspiration is something that many indian聽聽
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consumers have never seen before it's too good聽
to pass up but at what cost is this happening聽聽
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are bnpl companies doing enough to ensure that聽
their customers are able to pay off their debts聽聽
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bnpl companies of course will tell you yes but聽
i'll let you guys make up your minds on this one聽聽
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either way the space is growing rapidly it's聽
heating up there's plenty of competition聽聽
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and more indians than ever before are聽
experiencing the joys and sometimes the聽聽
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consequences of buying things now and paying聽
for them later all right guys thank you so聽聽
[894]
much for watching this episode of backstage with聽
millionaires and i will see you in the next one
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you
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