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As the Indian consumer market shifted to online platforms to buy their goods during the last year, Buy-Now-Pay-Later (BNPL) or embedded finance options have become commonplace on most e-commerce platforms. These credit-payment options offer consumers a short loan for a specific purpose.
BNPL credit products or their technical embedded finance essentially offers customers a small loan instantly in certain stores or on e-commerce websites. The reason why it’s called embedded is because the financial component (BNPL) is within a larger product (say an e-commerce platform).
For instance, a student looking to buy a laptop on Amazon or Flipkart can quickly apply for a loan to pay the Rs 30,000 bill. Within a few minutes, any of the BNPL and e-commerce partner lenders can check your credit score and offer you an instant credit line to pay for the product. All e-commerce apps from the stores to cab aggregators and food delivery have some for of embedded finance product that provides advance credit or buy now pay later options.
According to a study by Kaleido Intelligence, the BNPL market is worth around $90 billion at present. But given the pace at which online commerce is being adopted across the world, the digital point of sale market globally would be worth $731 billion by 2025, of which $352 billion will take place through such credit products.
According to a Research and Market survey, the Indian BNPL payment in India is estimated to be worth $11.5 billion in 2021 and would increase to $52 billion by 2028.
Lenders see greater adoption of BNPL
In the last year, non-banking finance company (NBFC) Capital Float added 150,000 customers each month by embedding an ‘instant credit’ option across e-commerce, travel and ed-tech platforms. It provided around Rs 140 crore on a monthly disbursal rate through its BNPL product at the end of March 2021. “Our digital finance platform has brought millions of Indians closer to formal credit lines, many of whom have been traditionally underserved,” said Gaurav Hinduja, Co-Founder & MD, Capital Float. Around 70% of their customer base is in the 25-40 age category, he said.
“These customers represent the next frontier for financial services, as nearly 50% of them don’t possess credit cards, 40% had never taken a personal loan before, and over half reside in non-metro cities. Apart from the widespread adoption of our buy now pay later offering, we’re seeing exceptional repayment behavior as well,” Hinduja said.
Paytm has partnerships with banks and NBFCs, through it provides credit cards and personal loans to merchants and consumers based on their users’ wallet activity. Paytm also launched Paytm Postpaid in 2020, to give an instant credit option to select set of users. Essentially Paytm gives a monthly credit line in the users’ Paytm wallet from Rs 20,000 to Rs 100,000, which needs to be repaid at the end of each month.
“Paytm has built modularised lending operation. Since it cannot lend on its own balance sheet now, it partners with banks and NBFCs to co-originate loans. Depending on the size and scale of the partner lenders’ operations, Paytm can provide a comprehensive solution or low-touch originator option. This varies by partner-lender, and by region,” said Gautam Chuggani, Director of Indian Financials and Fintech, Bernstein in a recent report.
Paytm leverages its franchise and risk model to gather behavioral data and credit risk insights, which helps their partner-lender with loan outsourcing, underwriting, loan management, and collections, the report added.
“Most BNPL products are on credit cards since the credit limit is set and the KYC has already been done. Lenders designed these BNPL products based on credit cards, and then they moved to EMI options on debit cards,” said Lalit Mehta, Co-founder and CEO, Decimal Technologies.
“So far BNPL, traditionally, needed a lot of more background work to provide that credit. But as the ecosystem grew and data became available, it became possible to make decisions on creditworthiness in just a few minutes. And that will enable greater adoption of BNPL, especially once it moves to the UPI framework,” he said.
Point of Sale (PoS) player Pine Labs also launched an EMI payment option with a number of retailers a few years ago through and recently with its Soft PoS app, for accepting payments on mobile, it is looking to compete in the merchant apps space. According to an interview with the Asian Banker, Pine Labs works with 35 lenders to provide the BNPL option across 150,00 merchants covering 100 brands.
“We see this BNPL category to touch close to $800 billion. A Deutsche Bank study showed that by 2023, it’s going to be $800 billion, which is close to 13% of e-commerce volume. The consumers are saying that they will spend more if they’re given this option. The ticket size will go up 15% more if that option is available to them. So, it results in higher ticket prices, less cart abandonment, and then more revenue for the merchants and the lenders,” Amrish Rau, CEO, Pine Labs told Asian Banker. Rau told AB that as a PoS player it has a 95% market share when it comes to BNPL services being delivered in the offline space. The company recently announced that it has entered Thailand, the Philippines, and Malaysia, and is looking to take its platform and services to Vietnam, Indonesia and Singapore this year.
The market leader in consumer embedded finance is Bajaj Finance. The lender was a pioneer in the embedded finance game by placing micro-branches within Tata’s Croma or Reliance’s Digital stores among many others. Bajaj offers instant loan options across nearly 1,300 locations with 80,200+ active distribution points of sale and has an EMI card business with nearly 24 million customers or 50% of its customer base as of March 2021, according to its investor presentation.
Given the scale at which the COVID-19 pandemic has hit traditional retailers, Bajaj is now looking to reap the benefits of a digital play. It is in the midst of rolling out an upgrade to its app ecosystem with 5 proprietary apps and 28 sub-apps and marketplaces.
Through this, the lender is looking to ring-fence its 48.6 million customer base and offer them a 3-in-1 financial services experience that will integrate lending, investments, and insurance in just one ‘super app’. With its own UPI app as well, Bajaj can also grow its base as payment and financial super app and digital ecosystem. For merchants, it will launch a sales app, merchant app, collections app and partner app between May and September 2021.
“We see that EMI card origination has now become a reasonably large standalone engine, the digital engine for us is now originating anywhere between 40,000 to 60,000-45,000 paid customers and 60,000 to 70,000 approved customers on a month-on-month basis. We think as this ecosystem will become large, it is very much possible that number will significantly expand,” Rajeev Jain, MD, Bajaj Finance told analysts in an earnings call on April 27.
“At this point in time we have 7.5 million Experia users so it will cut short or shorten the onboarding process significantly parallelly as we do this the productivity apps – our sales app ecosystem, our merchant app ecosystem, collections app, and partner app ecosystem will go live between May and September in a phased manner again between May and September. The Bajaj Pay for consumers is our payment infrastructure with BBPS services gone live. UPI in CUG has gone live and we are just waiting for regulatory clearance for PPI is ready to go live we are just waiting for approval for the PPI business goes live. The three marketplaces we have which is our e-store, insurance, and investment market place are in advanced stages of development at this point in time,” he said.
Understanding the economics of BNPL
Prior to the pandemic, banks saw the opportunity to leverage their relationships with merchants and ease the consumer experience through their product designs. However, with the pandemic striking a blow to the offline retail market, lenders see online sales as the future of commerce and where they should target their efforts towards new customer acquisition.
There are many ways of integrating BNPL products. While banks and non-bank lenders provide a traditional loan or EMI option on debit/credit cards through direct integrations with e-commerce and other web-stores and in-store with offline merchants, there are also specialist fintech companies that work on packaging the same debt, but in a different way.
Let’s say, a bank offers credit cards but due to its high credit checks, it can only offer this product to 20-30% of its account holders. With BNPL or consumer finance loans, the loan is directed to a specific purpose and need. Like the student who cannot qualify or afford a credit card, can still get credit for their laptop. If a credit card is offered at a 16%+ interest rate, BNPL essentially says you can buy the Rs 30,000 laptop, repayable in 6 automated recurring payments on your card or UPI account.
It is the same loan, but different wrapping paper. And as a consequence, embedded finance is financing a significant amount of large-ticket consumer purchases online and in-store.
According to Mehta as BNPL products based on cards on PoS machines or Soft PoS terminals will go slow due to lockdown restrictions, BNPL online will continue to grow. He said that India’s BNPL market will grow in the coming years as a domestic data economy takes shape with retailers monetizing their data and exchanging data.
“A traditional lender has two problems, they cannot specialise in providing small credit across multiple products from laptops, furniture to groceries, and they have limitations when it comes to reaching out to customers at scale. The independent BNPL player has specialisation in some purchase cases and products, and at the same time they can take of the technology integrations with retailers,” he said.
The leading standalone BNPL players include Zest Money, Kissht, Snapmint, Lazy Pay and Simpl. Each of these players is technically a technology company, while the bank or non-bank lender gives them a business loan. This loan, for instance at 12%, is then disbursed into thousands of smaller BNPL credit offerings with an EMI repayment plan. At the end of the period, the BNPL player pays the loan with fees+interest and EMI collections from their users.
Zest Money has over 8,000 brand partnerships through which it has built unique EMI payment options. The six-year-old fintech is backed by Omidyar Network, Goldman Sachs and Naspers, and served customers in more than 18,00 Pincodes last year. The company plans to take its BNPL option to 400,000 stores this year from around 15,000, according to a report by YourStory.
“We have always maintained that credit cards are not for the Indian market. Look at the innovation in payments and online shopping – Indians are leapfrogging cards to BNPL. It is happening right now at an incredible pace and we expect that to accelerate in the next 12 months, and we expect the market to double in the next two years,” Lizzie Chapman, co-founder, and CEO of ZestMoney told YourStory. The company is working on a UPI solution for BNPL credit products, like to be launched this year.
In the wake of the pandemic, Simpl witnessed a 40% increase in transactions for daily essentials on its merchant network. The company is focused on the small ticket size segment and aims to be the BNPL leader for transactions that consumers do frequently, said Nityanand Sharma, Co-founder and CEO of Simpl.
All a user needs to do is download their app, register and complete their KYC, and thereafter they can rake up a bill of Rs 10,000 (or more depending on credit checks) throughout the following days. At the end of the month, Simpl sends them a bill.
In most cases, the BNPL player will earn a yield on such a product or they could earn a fee for every new customer they source for the lender. The banks and lenders offload some of the credit risks to the fintech lender or BNPL platform through a First-Loss Default Guarantee. That is for every Rs 10,000 that is defaulted on, the fintech pays a certain proportion of the value back to the bank. These guarantees can range from 5% to 30% in some cases, industry executives told MediaNama.
“Being an unsecured credit product, the key to BNPL’s success story lies in its ability to control credit risk by leveraging upon data intelligence and cutting-edge technology tools to derive deep insights for prudent credit decision-making. The technology stack at Simpl is robust and advanced which has been instrumental in our growth,” Sharma said.” We harness machine-learning capabilities for our complete credit decisions. This has dual advantages of eliminating human bias with an accurate assessment of the creditworthiness of the end-customers,” he added.
Sharma explained that the company analyses over 100 features including the “behaviour of the user on the merchant platforms, the behaviour of similar users with an analysis of historical patterns, signals from app installations, and run them through an ensemble model.”
“We get millions of signals about users every day, which are processed, stored, and interpreted to enable credit decision-making at scale,” he said.