Meet ‘Buy Now Pay Later’ Apps, Which Are Slowly Killing Credit Cards

This payment method is becoming increasingly popular, but is it all that great?

Square Inc, the payments firm of Twitter co-founder Jack Dorsey, will be acquiring Afterpay, an Australian buy now, pay later giant, in a $26 billion all-stock deal. On the other hand, AfterPay’s European competitor Klarna is growing at a rapid rate in the U.S. The firm raised another $639 million at a massive post-money valuation of $45.6 billion in June.

What Is BNPL?

Buy Now Pay Later (BNPL) startups are growing, as this payment method has attracted a lot of attention. They do exactly what they claim — you get the opportunity to buy something without having to pay for it until a later date. The credit period for BNPL services ranges from 30 days to 36 months, depending on the transaction size. The credit amount also depends on the lender. For example, Flipkart offers a checkout process for up to ₹10,000, under their BNPL services. Meanwhile, ZestMoney, another BNPL lender, provides up to a personalised limit of ₹60,000.

But isn’t this how credit cards work? The difference is that BNPL is transparent and has a low-cost pricing model, while credit cards come with hidden charges and exorbitant interest rates. Unlike credit cards that require weeks and a lot of paperwork, BNPL schemes are much quicker due to digital KYC. Also, BNPL is much more accessible as it is available for new to credit customers or people with insufficient credit history. However, credit cards are for high CIBIL customers, people in metros and salaried employees.

The Rising Popularity

The BNPL sector became increasingly popular last year, as more people, especially the younger generation, chose to pay in instalments for everyday items during the pandemic. As people were faced with unexpected healthcare expenses, lay-offs and salary cuts, the BNPL model sounded like a Godsend for many. The other thing that led to the rise in growth of BNPL schemes is that the jump in online shopping, as people spent more time on their phones and inside their homes during the lockdown.

Lizzie Chapman, CEO and co-founder of ZestMoney told YourStory, “A large number of people are accessing formal credit for the first time in their lives — younger people, people in their first jobs, people working in the unorganised sector. They do not need heavy, burdensome products like personal loans or credit cards with high limits. They need bite-sized credit that they access alongside a purchase, which can enable them to afford things without incurring significant additional cost.”

Here’s a quick look at their enormous growth. Razorpay, a payment gateway for online payments, saw a surge of 163% in the number of BNPL transactions it facilitated in November 2020. Lazypay, another BNPL company, logged 75,000 new users every month during 2020. It also disbursed over ₹100 crore every month last year.

Simpl, which is also a BNPL app, clocked a surge in daily essential transactions by 50% of the pre-COVID levels via online orders. It also saw an increase of 1.5x in the average ticket size during last year. Zestmoney booked 50% growth in the average ticket size of edtech transactions, 30% in personal loans and 15% in ecommerce during 2020 as compared to 2019.

Famous Everywhere

The BNPL market is hot everywhere around the world, including the U.S, Europe, India.

Worldwide: A Worldpay report said that pay later accounted for 2.1% of e-commerce transactions worldwide in 2020, continuing to earn market share and anticipating to double by 2024. According to an Adobe analysis, BNPL in the U.S surged a whopping 215% year over year in the first two months of 2021. The BNPL startups saw up to 35% jump in online transactions for essentials during the lockdown.

In the Coherant Market Insights report, the BNPL platforms market worldwide was projected at $7,320.6 million in 2019 and is anticipated to reach $33,638.3 million by 2027 at a CAGR of 21.2% between 2020 and 2027. During the forecast period, the fashion industry is expected to own a dominant position in the market.

Europe: In a new report by Sifted, a European startup news site, BNPL arrangements is seeing record growth in Europe with demand from consumers increasing and investor sentiment remaining overall optimistic. Investment in European BPNL firms jumped 118% YoY to EUR 1.1 billion, while EUR 930 million has been raised in this year’s first quarter alone.

The BNPL trend is growing in India as well, and it is changing the country’s digital payments landscape. The growth is obvious. India is home to one of the world’s largest millennial and Gen Z populations, and they prefer BNPL apps over credit cards. India’s BNPL sector is anticipated to reach $100 billion by 2023-end, at a CAGR of 36%. Another reason why BNPL’s popularity surged is the jump in the e-commerce penetration in India.

Also, according to the Global Payments Report by Worldpay from FIS, as mentioned by Inc42, BNPL is estimated to capture a 9% market share in 2024, from a 3% share in 2020. According to a Deloitte report, it is anticipated to capture 11.4% of the Indian retail market by 2026 from the current 7%.

Downsides

BNPL sounds like a great concept, and the sector is booming. However, there are some cons to this. The biggest danger of BNPL is the temptation to overspend. In a 2020 survey by Cardify.ai, as mentioned by Consumer Reports, nearly half of BNPL shoppers said that they increased their spending between 10 to more than 40% when they use these plans compared with using a credit card. The survey also found that, two-thirds of BNPL customers said that they are buying jewellery and other “want” items that they might not otherwise purchase.

The other thing is that BNPL providers are not required to run background checks on new accounts, unlike credit card companies. These receive minimal, inconsistent oversight from regulators. Chuck Bell, the Consumer Reports advocate, told Consumer Reports, “Buy now pay later programs fall into a regulatory grey area and do not have the same consumer protections as credit cards.” Critics of BNPL schemes also say that the loose regulation makes them an easier target for frauds.

Even if you spend little amount of money via BNPL apps, you would still have to pay penalties if you miss the payment deadline. The other thing that you have to be wary of is the billing cycle. Usually, people pay their credit card bills once a month. However, BNPL loans may have a bill due every two weeks.

Zooming Out

Based on the current rate of growth as well as the projections, we can see that BNPL apps and platforms are here to stay for a while. BNPL apps may as well result in the death of credit cards due to their ease of access, and rising popularity. However, it might also push the younger generation towards accumulating debt. When there was a rise in credit card usage in India, there was also a rise in credit card debt. In 2016, RBI data showed that credit card outstanding amount stood at ₹42,100 crore at the end of May 2016 as compared to ₹27,000 crore during the 2008 crisis period.

Even though credit card debt is declining now, we cannot ignore the fact that BNPL has emerged as a better alternative for credit cards. The easy access to credit might lead to overspending, and rise in fraudulent activities. So, there should be a strict regulatory framework for BNPL platforms, so that they do not take advantage of the loose regulations. Just because they don’t offer big ticket loans like banks, doesn’t mean they should not be regulated. So, we need more transparent methods like BPLM, but we also have to be cautious about how we use these platforms, and not accumulate huge amounts of debt.