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Digital Indians love Buy Now Pay Later credit


After two decades of innovation in financial services in India, one statistic stands out for its lack of scale: the number of unique credit card holders. At around 25-30 million, that figure has long been surpassed by everything from debit cards and e-commerce to WhatsApp and UPI users.

In contrast, the United States has over a billion credit cards, with over $ 3 trillion in overdue limits. Credit cards are woven into the fabric of everyday life and consumption, totaling $ 1 trillion in spending each year.

But in recent years, a newcomer to the block has given plastic a serious bang for its buck. Buy Now, Pay Later (BNPL) has grown in importance over the past five years, offering shoppers easy ways to pay for their online purchases in installments. It has grown rapidly since then, becoming the fastest growing payment instrument in the world. In India, BNPL is just starting to take off, benefiting from the rapid growth of e-commerce – accelerated by the pandemic – and a growing Millennial consumer base. But as BNPL sought to disrupt credit cards in the West, India, this represents a unique opportunity to leap into a whole new digital paradigm first to enable small credit for the retail consumer.

Over 75 million consumers who actively shop online in India today do not have a credit card. These customers are underserved by formal credit, but they are data rich and digitally active. Usually between 25 and 40 years old, they are a mixture of salaried professionals and small entrepreneurs. Their first port of call for a product or service is usually online. As they navigate these choices, aspiration and affordability become the key balance in everyday household purchasing decisions.

At the same time, it is the target market that merchants and brands want to tap into. By offering credit, on a contextual basis, at checkout, BNPL can dramatically increase conversion and average order value more than 2x for these merchants.

BNPL in India now appears to be at a tipping point. A combination of factors (growth in e-commerce, millennial purchasing power, underpenetration of credit cards, digital financial rails) is behind this phenomenon. As this market opportunity deepens, what will it take to win at BNPL?

Technology: Much of BNPL’s customer appeal lies in its simplicity. It allows consumers to divide the value of their purchases into several installments payable over a period. Pricing is transparent, either at zero cost or at interest for the customer. Designed to transform the shopping experience, BNPL integrates payment and credit into a one-click option at checkout. Providing this experience requires great technological agility behind the scenes.

Strong risk management: BNPL is, ultimately, a credit product. It is best to provide it in a regulated format, with checks such as an appropriate KYC (know your customer) and credit bureau reports in place. Strong underwriting policies, portfolio monitoring, repeated behaviors and effective collections are essential to achieve correct loss rates and unit profitability.

Interestingly in India, BNPL has been one of the best performing credit products thanks to Covid, an otherwise difficult time for the lending industry. Industry-best cohort loss rates in India for BNPL are currently 1.5-2%. Collection efficiency, even in the event of a blockage, remained around 95% for these products.

Ultimately, risk management will be the long-term divide for successful BNPL players in India. This stems from the unique opportunity to build a repeatable business around the more than 75 million customers who don’t have a credit card today but increasingly shop online. The game has only just begun. BNPL now accounts for only 3% of GTV e-commerce in India, a market that is expected to grow by 30-40% CAGR over the next 5 years. But beyond e-commerce finance, BNPL represents an even greater opportunity to build a larger financial services game for the next frontier of customers and to become a one-stop-shop for all of their financial needs.

Sashank Rishyasringa is Managing Director and Co-Founder of Capital Float.

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