Reading Time: 5 minutes
In 2020, the year of the initial onslaught of the pandemic, e-commerce and digital payments took centre stage. In 2021, the payments space saw competition heat up, along with the steep rise of Buy Now Pay Later – the payments wild card. An Edelweiss report confirming the rapid adoption levels of BNPL, predicts a 45%+ CAGR (2020-24) soaring to a $15 Bn market while capturing 9% (up from 3% in FY21) of e-commerce payments and 1.3% (up from 0.4% in FY21) of digital payments by 2024.
In FY21 alone, the study indicates an impressive $3-3.5 Bn disbursals were made via BNPL. What is interesting to note is that the BNPL phenomenon is being referred to as a secular trend and not just a ‘flash in the pan’. We shall look at Simpl’s robust BNPL offerings, how BNPL performed in 2021 and what lies ahead.
Simpl’s BNPL offerings: A cut above the rest
- Simpl is a pure-play Buy Now Pay Later player that offers the following:
- Buy Now Pay Later: Our flagship product
- Bill Box: This feature enables Utility Bill Payments across categories
- Pay-in-3: A convenient repayment facility for customers to split repayments into 3 flexible installments.
- Performance that speaks volumes: Simpl saw a 7x jump in revenues in 2021 and significantly widened our merchant network to over 7200 partners with diversification across product categories.
Global BNPL: Defined by big-ticket M&As
A study by ZIP reveals that BNPL’s global addressable market size is estimated to be a whopping $22 Trillion, presenting a long-term growth opportunity. With a maturing credit ecosystem, the global BNPL industry is heading towards a higher degree of consolidation. This is reflected from the recent buyout of AfterPay by Square for a sizable $29 Bn and PayPal’s acquisition of Paidy for $2.7Bn. News through the grapevine suggests that Affirm, Klarna, Sezzle and Zip may be potential targets for similar buy-outs, though there is no formal confirmation.
A Forrester study predicts that major banks may acquire Amount, Sezzle or Splitit to diversify their offerings. It is believed that leading brands like Amazon, Walmart and Apple are planning to further penetrate the BNPL segment. Buoyed by increased Gen Z and millennial adoption, the global BNPL market is slated to witness transactions cross USD 1 trillion by 2025, a 10-15x growth spur as per BofA.
India: A market that’s ripe for BNPL acceptance
India’s BNPL sector is distinct from its global peers. For example, while globally BNPL players have developed integrated shopping platforms that cover the complete buyer purchase journey, in India, the role played is largely that of a sales facilitator i.e. via credit-enabled payments mechanism. India also holds the credential of being the #1 market in real-time payments transactions, which reflects that customers in India prefer to have an almost invisible payment experience that’s completed in almost no time. This aligns well with BNPL. In fact, Simpl’s BNPL is completed with just a single tap in an instant.
Source: Financial Brand
Consumption as the prominent theme
Over the years, with rapid urbanization, the emergence of the middle class with aspirations and increased buying capacity, India has transformed from a savings-driven economy to a consumption-led economy. India’s consumption-demand driven economy augurs well for a consumer-centric product such as BNPL. There has been a marked jump in e-commerce and the consumer internet market which is slated to grow from a GTV of $90Bn in FY21 to an estimated $ 300Bn by FY26, a steep 27% CAGR. The chart below sums up the positive correlation between the fortunes of e-commerce and BNPL:
Bridging the credit gap amidst growing demand
BNPL caters to a large addressable market comprising the low income and middle-class segments that have limited purchasing power owing to the COVID crisis and are open to short-term, unsecured microcredit. A World Resource Institute study estimates that 15% of India’s population has a gross annual income between $2000 and $5000 per year, which is predominantly the target group that BNPL serves.
Buy Now Pay Later Benefits: For Customers and Merchants
BNPL adds value both on the demand(read: customers) and supply-side (read: merchants) of the e-commerce chain.
Benefits for customers:
- Instant credit access: Through automation tools, the credit assessment is prompt without the hassles of extensive documentation
- Enhanced affordability: Customers get immediate purchasing power with negligible interest costs and without an upfront cash outflow
- Convenience: Flexible payment option, with payment deferment by 14-30 days or option to split the repayment into instalments
- Transparency: Soft credit checks that do not significantly impact CIBIL scores
Benefits for merchants:
- Enhanced cart conversions: Higher average value of transactions (AOV) as customers can afford more purchases with zero-interest instalment repayment options. For example, Faasos reported a jump of 40-50% in terms of the number of transactions from the same user after its partnership with Simpl.
- Effective customer retention strategy: Since BNPL enables customers to extend their payments over the interest-free payback period, the customer engagement is for a longer duration. This might translate into greater customer stickiness.
- Higher liquidity: BNPL pay e-retailers in full, minus the fees charged for the BNPL service
Buy Now Pay Later Business models in vogue
Broadly the BNPL industry in India comprises the following variants:
- Based on repayment
- Deferred repayment – Generally availed towards low-value purchases
- Shopping EMI loans: Generally availed for big-ticket purchases like consumer durables etc
- Based on the revenue model
- Rate charged from merchants: As per the GMV, this could range between 2–6%); or
- Fee charged from customers: This could be structured as late fees, recurring fees on a monthly basis or subscription fees
Diversification of monetization opportunities
A fee-based income model translates into requiring higher scale i.e. high volumes of transactions in order to retain margins or take a longer time to break even. However, this applies mainly in the case of low-value purchases in the B2C model. In the case of B2B BNPL or high-value EMI based repayments in B2C BNPL, the margins would be higher.
Reimagining retail credit
With the onset of digital payments and evolving delivery models in financing solutions, the convergence of technology and financial services has resulted in innovative embedded offerings in the consumer credit vertical. It is predicted that the following categories would be key beneficiaries of the BNPL trend: online retail, online travel, food delivery, e-health and e-grocery.
Young demography to hold the reins
BNPL, in India and globally, has been a popular payment choice for millennials and Gen-Z. This may be attributable to the fact that often BNPL products are the primary credit product exposure for young customers falling in the 18-25 years age group. Another aspect is that customers with a thin credit file or a poor credit score often face challenges in accessing credit from traditional borrowing channels. They turn to BNPL to fund their purchases.
It is estimated that 22% of India’s population falls in the 20-39 years and 10% fall in the 0-19 years. The consumers in these age brackets called digital natives are Internet-savvy, prefer tech-powered credit options and are very familiar with mobile payments, online transactions and app usage. It is estimated that by 2025, 50% of transactions would be via digital platforms, a massive jump from 20% in 2020.
BNPL continues to garner attention
BNPL is going through an exciting phase in India. Customers are keen to explore convenient payment options that offer flexible repayment and are low-cost (zero interest during payback period). Since BNPL scores high on these parameters, in the coming days, we can expect BNPL to achieve wider penetration and further deepen the product portfolio.