Buy Now Pay Later (BNPL) as a payment mechanism has transformed the lending industry globally and proven to be very successful in developed nations such as the U.S., Sweden, and Australia where it has grown into a multi-billion-dollar industry.
However, when we talk about BNPL in the Indian market, there is a lot of difference in terms of customer base and usage. Pegged to be the fastest growing economy in the world by the IMF, India’s global growth aspirations are significantly stunted by the large credit gap for a vast majority of its population, with only about 100 million people having access to formal credit.
The credit penetration rate appears even more dismal given that over 250 million Indians are digitally savvy or transact online, and are yet denied formal credit. The paucity of credit information on users and the high cost for physically onboarding a large number of users have dissuaded financial institutions from trying to bridge this ever-widening gap.
BNPL in India can address this issue by combining the convenience of digital payments with daily life purchases and help individuals with low or no credit score build a good credit history. The panacea is rapidly emerging in the form of a recent shift towards Buy Now Pay Later products that offer zero-interest credit for online shopping.
I believe that millions of Indian consumers, who would have otherwise remained deprived of formal credit will be able to use BNPL at their best in 2022.
For the uninitiated, BNPL is basically a form of small ticket loan that allows people to buy products or services and pay for them later having an interest-free period. What makes BNPL revolutionary is how it helps Indian society in dealing with daily expenditures such as grocery, household bills, shopping, travel, and more with an added advantage of digital payments.
BNPL’s future growth
One of the important variables that will push BNPL demand even higher in 2022 or beyond is a shift in consumer behaviour from being savings-focused to consumption-focused. Further it is estimated that India’s BNPL market will rocket to $45-50 billion by 2026 from the current value of $3-3.5 billion.
A significant portion of this market will be addressed by consumers’ growing aspirations and need for convenience. E-commerce giants such as Flipkart and Amazon are already witnessing higher demand from small Indian cities. Middle India is being seen as the fastest adopter of internet. People here are now realising how internet offers access to brands and products that would have otherwise remained unexplored by them. In a report published by digital book-keeping app OKCredit, India's informal BNPL model witnessed an increase with the repayments being 12% higher than average and the merchants witnessing 15% growth in their business. BNPL has also resolved the issue of people not repaying on time, making it a safer option for the sellers.
Undoubtedly, India still has a long way to go in terms of credit penetration as compared to the developing world, where credit card penetration rates generally cross 50% of the population, which is one way to measure formal credit reach. What is interesting is that while in developed nations BNPL is an alternative to credit cards, in India it holds the promise of giving first credit experience to millions thus far denied credit. Nonetheless, the growth of new, innovative fintech firms in the Indian market is fast bringing a change to this scenario. This is evidenced by the fact that even traditional banks and financial institutions are now looking to enter the BNPL space.
After a difficult Covid-19 year for the credit industry in 2021, the digital payments sector in India experienced a substantial early uptake of the Buy Now Pay Later paying mechanism. It has been the most convenient and adopted payment option, allowing for simple one-click payments. In 2022, the pace is predicted to speed substantially, with tens of millions of additional users embracing BNPL in their everyday life, resulting in considerable credit penetration among millennials and Gen Z in India.
The near-ubiquitous reach of the internet and the aspirational optimism of young India suggests that BNPL is indeed set to break the glass ceiling of credit in 2022 both in terms of value as well as reach.