India buys into a new credit facility

There has been a marked decline in the credit card business of Australian banks due to adoption of BNPL, projected to grow to $52 billion by 2028.

By Sashank Rishyasringa

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India appears poised to resume its march towards the vision of a $5 trillion economy. No country in modern history has achieved this level of growth without a concurrent expansion in retail credit. Yet for all the financial innovation of the past decade, India’s credit gaps have remained surprisingly persistent. Few areas demonstrate this as starkly as credit cards. While credit card circulation grew moderately to 64 million in 2021, their overall penetration remains at just 5% of the country’s population. In comparison, the US has over 1 billion credit cards in circulation; the UK has 63 million cards in use for a population of 68 million. Against this backdrop, a new consumer credit model is gaining traction in India—a simple small-ticket credit option that enables people to spread their digital purchases over multiple instalments, at the click of a button. This is Buy Now, Pay Later (BNPL), a digitally-driven credit facility rapidly gaining traction in India.

BNPL enables customers to pay for both higher-priced products and essential items in small instalments over a period of time, with no paperwork involved. The unprecedented convenience has significant appeal for young professionals, leading to a 6X increase in BNPL users among the Gen-Z in the US, and a doubling of millennial users between 2019 and 2021. Together, these customer segments are expected to drive retail purchases using BNPL to $100 billion in 2021. The appeal of the model is increasingly evident, with 43% of US adults now considering BNPL as a viable way to cover a variety of spiky expenses, ranging from home repair and big-ticket travel to healthcare. The US BNPL market is poised to expand to a whopping $309 billion by 2028. Australia reports similar trends. More consumers are now inclined towards deferred payment solutions, offered widely by online BNPL players. There has been a marked decline in the credit card business of Australian banks due to adoption of BNPL, projected to grow to $52 billion by 2028.

India is a relatively new entrant. But early signs point to a future where it could well become the largest BNPL market. While Covid-19 may have been the catalyst for BNPL’s breakout moment here, market dynamics point to the inevitability of this trend. Millennials account for 34% of the Indian population, well above the global average. These digitally-native consumers are now driving the growth of e-commerce, armed with digital payment options that rival any developed market. Yet relevant, contextual, easy-to-use credit options lag sorely behind. In the West, BNPL presented a way to exit the credit card debt cycle and choose more transparent, affordably-priced leverage. In India, it represents an opportunity for advancement and growth, as a vast segment of financially underserved customers seeks to participate in the newly digitised formal economy.

Given the under-penetration of small-ticket, regular-use consumer credit products in India such as credit cards, a large percentage of the population lacks sufficient formal credit history, without which they cannot avail of loans from larger financial institutions. BNPL providers are serving these customers by employing innovative and new-age underwriting techniques to determine creditworthiness, taking a low-and-grow approach to risk management and customer exposure. As a result, leading players have been able to successfully serve millions of consumers till date, while keeping default rates below 2% even through one of the worst macroeconomic dislocations in recent memory, in the form of Covid-19.

In addition to extending credit to underserved segments at low default rates, BNPL players have also radically redefined the user experience (UX) for retail credit in India. Customers can apply, submit KYC and receive instant approvals within seconds at checkout, buying their chosen products on credit in real-time.

Most BNPL options are one-click across merchants once a customer is approved, beating most existing payment options on ease and reliability. Multiple tenure options, transparent pricing, and zero- or low-cost interest further enhance the attractiveness of the model. With the third-highest population of e-retail shoppers in the world (after the U.S. and China), India has massive headroom for BNPL to continue to grow.

BNPL companies in India look to the West for inspiration to emulate the success and adoption achieved; however, it is good to be observant and thoughtful before implementing the learnings from the West while designing BNPL as a customer-friendly service. Indian BNPL companies can build a fully regulated product from the outset, instead of attempting to align the product with regulatory requirements once it has achieved sizeable scale. These small-ticket lenders can also practice responsible lending by implementing strong credit algorithms which can estimate the income of their customers.

In India, the product is finding application across a host of other sectors where affordability is a key barrier to solve, while in most developed markets, BNPL has been largely limited to e-commerce. BNPL options now exist in education (from test prep to upskilling), healthcare (from elective procedures to wellness), clean energy devices, and even insurance. With so many growth drivers coming together, India’s BNPL industry is expected to reach $40 billion by 2028, emerging as a win-win for consumers, merchants, fintechs and their partner banks.

The author is Co-founder and MD, Capital Float