In this article, we will be understood in detail the Buy Now Pay Later (BNPL) System. What is it, how does it affect the credit scores of individuals, is it good or dangerous to avail
What is BNPL?
- Firstly, BNPL acronyms for Buy Now Pay Later system. It is a short-term small loan provided to an individual based on credit history.
- BNPL is generally no-interest or comes with low-interest rates.
- BNPL helps the individual to get individual loans on a faster and more immediate basis.
Why Does BNPL matter to Retailers & Consumers?
- It accelerates the consumer’s decision to buy.
- Increases shopping cart size and conversions.
- Improves Customer Engagement- More flexible payment options allow customers to continue to stay engaged with a brand.
- It increases purchasing power
- It increases payment transparency, safe, and secured transactions as BNPL offers interest-free payment plans, and easy to use to options, particularly for the younger generation.
- Easier to use- BNPL is more accessible than Credit Cards, properly road-mapped integration with Retailer’s POS interface which offers a uniform payment experience to the customer.
BNPL Players in the Indian Market:
Some of the famous players BNPL players in the Indian Market are:
4) Ola Money Postpaid
5) Amazon Pay Later
6) Paytm Postpaid
7) Capital Float
How does BNPL Works- Is it a Loan or Not?
- A BNPL platform offers Zero-Interest Credit at the payment check-out Point of Online Shopping Platforms.
- BNPL is simply a loan where its underwriting is done by Non-Banking Financial Companies (NBFCs). This BNPL company ties up with an NBFC for providing these loans to the customers.
- Simply, BNPL players send their profiles of the consumer to their respective NBFC partners, the NBFC will underwrite the loans for the consumer in a very fast manner.
- Even though the amount disbursed under BNPL loans is only 0.73% through Scheduled Commercial Banks (SCBs) and 2.07% via NBFCs of the total amount disbursed.
- The volumes are quite significant indicating a large number of small size loans for consumption.
What You Need to Know About BNPL:
- The credit offered at the checkout is not approved instantly and instead is drawn from a pre-approved credit line that the consumer is assigned when a customer signs up with a BNPL platform.
- Customers don’t realize by signing up for any pay later service, that they are giving their consent to the partner bank or NBFC to release a credit limit for them similar to what happens when we get a Credit Card.
- Thus, BNPL is not a just payment method like Debit Card/UPI/Net Banking, but a Loan- a Pre-Approved Credit Line.
- Though Customers sign-up for a Credit Line and not in BNPL services, in the books this credit line is categorized as a Loan in the customer names, due to which Customers’ Credit Report reflects Outstanding Loans.
How doe BNPL impact Credit Score:
- Missing a payment in a BNPL loan is reported as a delinquency to the credit business, just like any other loan.
- Delaying a loan payment even by a day is reported to the credit bureaus by banks and NBFCs.
- Even if some platforms allow to pay a minimum balance while the rest of the amount is carried forward, it can still hurt the CIBIL score.
- An unutilized credit line can also lower your credit score because when you enquire for a credit line and it gets sanctioned, you are supposed to use it, and not doing so may hamper the CIBIL score.
- Signing up for or even enquiring at multiple BNPL services cuts down the CIBIL score.
- Some BNPL charge only late fees while other BNPLs slap an interest over and above it.
- Some of the fee structures of BNPL fees are:
- Processing Fee- 0%-2%
- Late Payment Fee- Rs. 100-Rs. 600 (Typically a flat fee is charged at each default.
- Interest Rate- 2%-4% per month.
- Carry Forward Fee- 2%-4% (It is charged when the minimum due is paid and the remaining balance is carried forward to next month.)
What Should Individuals Do?
From a financial planning perspective, one should always debt option of any kind with the general exception of a Home Loan or Education. The BNPL system comes up with a lot of negative impacts on consumers’ financial health and hence one should cautiously use it.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.