Buy Now Pay Later: What it is and how to maximise its benefits

BNPL service providers often use new-age mechanisms to evaluate the creditworthiness of an applicant; thus, the customer onboarding process is usually fast and convenient with zero documentation requirements or joining charges.

Buy Now Pay Later (BNPL), as the name suggests, is a micro-credit instrument. It’s for consumer purchases that allows spending facilities just as a credit card. BNPL users get to split their eligible online or offline purchases, i.e. purchases made with partnering merchants, into zero-to-low interest instalments or repay the total dues at a later date within the repayment cycle at no interest charges, according to the terms and conditions of the BNPL service provider.

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The signing up process is quick and the credit limits offered could be anywhere between Rs 5,000 and Rs 60,000 (or even higher, in a few cases) with repayment cycles usually in the range of 14 days to 30 days. BNPL in India is gaining astronomical popularity with nearly 40 players, including start-ups, e-commerce giants, leading private banks and NBFCs already in the fray. These players have already added millions of customers and hundreds of merchants to their networks while attracting millions in investments.

In fact, a Global Payments report by Worldpay from FIS has predicted BNPL to be the fastest-growing e-commerce payment method in India growing from 3% in 2020 to 9% of the total e-commerce market share by 2024. The elimination of interest charges by most providers of this revolving credit facility for deferred repayments of dues within the repayment cycle is a critical differentiator; however, late payments usually attract a fixed penalty and could hurt the credit score of such users.

So, if you too are planning to sign up for a BNPL service, here are a few important things you need to know and consider.

How do BNPL services work?

BNPL service providers often use new-age mechanisms to evaluate the creditworthiness of an applicant; thus, the customer onboarding process is usually fast and convenient with zero documentation requirements or joining charges. The entire process is digitally enabled through internet-connected mobile devices like smartphones and laptops often using designated applications. Upon approval, a BNPL service provider issues a line of credit based on its assessment of the user’s creditworthiness and income. This credit line can be used for making eligible purchases from partner merchants. After signing up, users can visit a partnering merchant application, website or offline store (in some cases), add the desired items to the shopping cart, and select their BNPL provider’s payment option at ‘check out’ to buy the selected items in a secure one-tap manner.

Users can then clear the outstanding dues later using net banking, UPI, debit or credit cards within the repayment cycle at zero charges or convert their dues into zero-to-low interest EMIs, according to the terms and conditions of their BNPL service provider. Late payments will attract a fixed penalty in most cases while any delinquency would be reported to credit bureaus. On the other hand, timely repayments would ensure BNPL providers replenish or even increase the credit limit of the user at the beginning of the next repayment cycle. Some BNPL service providers also offer extra incentives to customers in the form of additional discounts or cashback for availing of their facilities. These instant funds-offering platforms for consumer purchases generally make money through merchant commissions and late payment fees, not interest charges.

The many advantages of using BNPL services

Hassle-free access to micro-credit lines for consumer purchases is one of the biggest advantages of BNPL services. These facilities help countless customers, especially the ones who have just started working, to better manage their expenses by allowing them at least a few weeks to make the repayments. BNPL services, thus, are rewarding spending tools for those who are yet to recover from the many financial shocks of the pandemic-induced lockdowns or are outside the credit card ecosystem. The absence of interest charges on outstanding dues is another significant advantage. The ease of signing up for a BNPL facility and making eligible purchases in addition to partnerships with hundreds of merchants are also enabling the rapid popularisation of this instrument.

However, keep in mind

Users must keep in mind that a BNPL facility is still a loan that needs to be repaid in full on time to avoid penalties and an adverse impact on their credit scores. The hassle-free access to credit, no interest charges or a growing list of partnering merchants shouldn’t encourage them to spend recklessly. As such, they must exhibit financial discipline and thoughtfulness while using BNPL services.

Also, while BNPL service providers are adding new merchants to their networks on a daily basis, they should still sign up with a top-rated provider that’s linked with the merchants they shop most frequently with. They should also carefully read the fine-print of their chosen BNPL service provider and get complete clarity about the features and penalties before signing up. They should also sign up with only credible BNPL services providers and be wary of players, for example, whose mobile application requires permissions that are not proportional to the services offered.

In conclusion, BNPL offers simplistic credit solutions for users to better manage their purchases and expenses. But informed and disciplined usage is key to maximising its many benefits.

(The writer is CEO, BankBazaar.com)