The hottest debate in fintech for emerging & established markets currently is between the rise of BNPL as a competitor to Credit Cards in consumer lending.
For the uninitiated, BNPL stands for Buy Now, Pay Later. BNPL provides a 1-click checkout experience to buyers without any hassles — no need to remember card details or cvv, no otp or no additional authentication required. Thanks to this checkout experience among other factors, it’s growing in a big way. On the other side for retailers, it helps improve the boost cart conversion and improve revenue.
In this blogpost, we’ll first covers some of the pros and cons of BNPL vs Credit Cards. And then we’ll explore its evolution across the world. And finally we’ll end with some predictions for the future.
BNPL is a combination of 2 innovations in the credit space — EMI and Mobile credit. With the advent of mobile, it’s become very simple for anyone to create an account & complete underwriting digitally. And once open this account can be used to power the purchase of a huge number of people to get consumer products via EMI. Just opt-in for an EMI at the merchant outlet & a huge range of customers were newly introduced to credit.
To give you some context about the Indian Credit Card market, India has about 62 million credit cards in active usage as per the latest June, 21 RBI report. With the assumption that each person on average holds 2 credit cards, we suppose that there are 31 million unique credit card users in India. However if we compare this with the number of users who have a record in the credit bureau(CIBIL & Experian being the primary ones), the latest numbers point to about 300 million users with a ton of users being ‘thin’ file users with very little credit history or short term loans. Thus a huge segment of users don’t have access to credit via traditional credit card services. And this is where BNPL has made it’s mark.
Klarna, a Swedish fintech company offering BNPL has 90 million active consumers across 250,000 merchants in 17 countries! Afterpay, a service with presence in US, Australia, Canada and a lot of other European countries has more than 16.2m users. And Klarna was valued at $31 billion as per some estimates.
Opportunity for BNPL
Creating a merchant ecosystem outside of VISA/MasterCard
The opportunity for BNPL providers is huge. Currently payment networks like Visa and MasterCard control the payment rails for cards and provide access to merchants. And it’s been impossible to break this duopoly. Every card issued, every payment completed results in a txn fee for the payment network.
As new BNPL players aggregate merchants — both online and offline, they have the unique opportunity to create a new payment rails. Without the existing payment networks and to control the end-to-end user experience.
Credit cards typically have been associated with higher ticket size but lower frequency purchases like electronics, shopping etc. BNPL on the other hand has grown from the convenience of the 1-click checkout — users using it for cab bookings, food delivery and other frequent purchases. Sometimes multiple times a day.
Pros and Cons — Comparing Credit Cards Vs BNPL
Let’s understand some of the factors that currently favour BNPL. Please note this table is in the context of the Indian Market.
The factors in favour of BNPL –
- Low access to Credit cards — due to a stringent requirement for credit approval, the base of CC is still low.
- Lack of EMI options in CC — some CCs have high fees and might not have an EMI option
- Quick process — To get a CC, traditionally one has to fill lengthy forms and provide income documents etc. BNPL on mobile on the other hand is instant
- Decent margins — 4–6% from merchants
The factors against BNPL –
- Lower limits — As low as Rs. 1500
- Higher possible defaults due to less stringent credit checks.
- Limited merchant coverage
- Lack of International usage options
- 15 day payment cycle
- No rewards
- No lock-in
If we analyse this across items like friction of payment, payment cycle etc — we can see each player has some advantages. However this is fast evolving as I’ll explain in the next section.
Becoming a Shadow CC with a bigger base & less regulation
We’re seeing a quick evolution in the BNPL space. BNPL players are trying to bring the perks of being a CC — high engagement, high spend per card and a 30 day cycle to BNPL. Let’s understand this evolution.
In India most BNPL players started with credit lines as low as Rs. 1500 facilitating instant purchases on apps like Dunzo, Swiggy, Ola and the like. However an evolution is happening. This is happening in 3 phases.
In the first phase, BNPL players are aggressively marketing interest free EMI propositions as ‘Pay in Parts‘ — of 3/4(based on what you favour — Uni is doing 3 parts, Klarna prefers 4) to capture a larger spend of the Wallet. And an increasing merchant base helps provide affordability to a huge % of users. Thus it goes beyond lower ticket purchases to higher ticket sizes like fashion and electronics. In India, we recently saw the launch of Uni card which is offering pay in 3 parts as the primary proposition with its 1/3 rd Card.
In the 2nd phase, this proposition is extended to 6–12 month EMIs to bring in interest income. This is a further attempt to increase the ticket size and increasing income while keeping the overall outstanding low.
The third phase is the most interesting one in this transition. BNPL players are moving towards a 30 day interest free cycle, one that matches with your monthly income/default duration to become an ‘everyday purchase instrument‘. One that you use everywhere, at merchants big and small. And one where you pay interest post 30 days at rates as high as 18–19% ANR. Quite similar to a Credit Card.
As you can see in the above diagram, Klarna currently offers all 3 options to help service all types of customers.
The final piece in the puzzle — Extending BNPL to the offline world
A key part missing in this puzzle of BNPL is offline merchants. By some estimates almost 50–60% of all spends are offline in a CC based on industry estimates. We’re seeing interesting activity in this space with POS players acquiring BNPL players or loyalty players to either acquire end active users or a loyalty program. We also saw Payments company Square recently acquire AfterPay — a leading BNPL provider.
Here is where the recent plays by Pine & the acquisition of AfterPay by Square become super interesting.
You can read more about it & explore some comments here — https://www.pymnts.com/news/payments-innovation/2021/what-the-square-afterpay-deal-means-for-bnpl-fintech-bigtech-and-banks/
In the cons for BNPL, one of the prime risks was higher defaults. This is due to a couple of reasons –
1. More new to credit customers(thus not used to using Credit)
2. Offering services to riskier customers & less stringent underwriting
3. Less defined checks on transactions
Higher defaults are a given as they offer services to people new to credit and with lower credit scores/bad history. However as BNPL evolves towards a credit card, it’s going to be an interesting competition between CC players expanding the market and BNPL players managing risk better.
For now BNPL players are focusing on aggressively acquiring market share while CC players try to evolve their offer to fit the new mobile age. Interesting times ahead indeed.
If you found the article useful, please feel free to hit the share with your friends. I’m a product builder currently re-defining credit in India. If you’re interested to work with us, please DM me here or on Twitter. I love all things consumer — fintech, social, video and music.
If you’re interested in QR payments, you’ll find my blog on it interesting — https://productnotes.in/is-qr-the-future-of-payments-transactions-in-india/
This was first published on my blog at productnotes.in