India's economy is among the fastest-growing in the world, yet there is considerable inequality in access to formal finance.
Banks and financial institutions (FIs) are striving to close this gap by providing new payment products and tools that make formal credit more accessible. This disruption in closing the credit gap is largely because of the FinTech players who have introduced new and innovative products.
According to the RBI, there are a total of 7.36 crores of credit cards in India. The majority of transactions done through credit cards are on e-commerce platforms compared to Point of Sales machines. Banks saw this as an opportunity to incorporate quick and easy credit in the e-commerce space. Leading to countless cobranded cards that are made in partnership with e-commerce giants. Amazon partnered with ICICI & HDFC, and Flipkart with Axis Bank, among others. This has snowballed the number of card users in the country, especially those transacting on online platforms. In 2021, only three in 100 Indians owned a credit card, and even a lesser percentage used credit cards for payments. The number has now increased to 5.5 per 100 Indians. Picking up on this phenomenon, there is now a new challenger to credit - Buy Now Pay Later (BNPL). BNPL is revolutionising the customer journey by seamlessly integrating itself into e-commerce checkout. With fewer initial downsides, adoption is booming, particularly among millennials. Merchants love it as a means to boost sales and improve conversion at checkout. There are 200+ Fintech companies competing for the big slice. So let’s figure out where is it headed - What is BNPL? BNPL is a short-term micro-credit that enables consumers to shop online and pay within a few days or weeks with little to no interest. It increases the purchasing power of the consumer simply by breaking the absolute price to smaller interest-free instalments. Generally, there are two types of BNPL Loans:
No-interest loans - With these types of loans, the merchant pays a fee to the third-party lending company rather than the consumer paying interest on the loan. LazyPay, slice, sezzle etc
Loans with interest - These on-the-spot loans enable the consumer to make the purchase at the moment, but with interest similar to a credit card. Amazon pay ICICI credit card, Flipkart axis bank credit card etc
What is the need?
Banks have long been upselling credit to prime credit-seekers i.e salaried individuals, but have been less than effective in reaching the market outside. There is a large market of new Credit and Non-Prime, left untouched.
This is where the collaboration between FinTechs and lending institutions proves critical. FinTechs have the technological edge that banks are working to build. From onboarding to repayment, Fintech has an end-to-end digital process that makes lending convenient.
For example, a college student could open an account with Slice and actively seek credit up to Rs 30,000. Given timely repayments and conscious use, one could start building their credit history starting at the age of 18.
How is the ecosystem looking?
Murky. Some BNPLs have opportunism coded in their DNA, which makes them inadvertently risk-seeking.
In August 2022, RBI issued a notice in lieu of irregularities and frauds. The new RBI guidelines stated that non-banks can no longer load prepaid instruments — digital wallets, or stored-value cards - using credit lines.
Banks are the only authorities allowed to issue credit cards in India with strict rules. Many BNPL companies began to circumvent the rules by partnering with banks to issue cards with diluted KYC processes and little to no checks on credit histories, forcing the RBI to consider stringent measures.
These BNPL companies used what we call Prepaid Payment Instruments - A digital wallet that one can top-up using a bank account, debit card or credit card.
The user then can use the ‘stored money’ to make purchases.
But many BNPL companies went a step ahead.
If the user doesn't have enough money to load the wallet. The BNPL did it for them. They issued a PPI license with XYZ bank and the BNPL companies use their own license to top up the card with a loan. If the user defaults, it is the NBFC’s loan book that gets affected and not the XYZ bank that extended the credit.
To put it simply, RBIs’s major contention is prepaid money has to be the users’ money. Credit is not for the users, it has to be paid back. Banks essentially want BNPL companies to call spade a spade.
BNPL by far is a great tool for extending credit penetration in India. With credit cards only serving 6% of the population. But without proper diligence and regulatory practices, it might end up in a quandary.
The informal lending sector, on the other hand, is a different kettle of fish. Something we at Rang De are working toward.
Know more about how we do it at rangde.in