Have you shopped online recently? Then I’m sure you would have come across the “Buy Now Pay Later” option. This is a result of FINTECH. With the effect of COVID-19, people preferred to purchase online and online payment over physical shopping. BNPL was cherry on the cake to such people who wish to defer their payments. Many people switched to BNPL, especially those who don’t own credit card.
What is BNPL?
It is an option where customer can buy products or receive services but without paying immediately. The payment could be done on a later date but within due date without incurring any interest. Dues can be converted into EMIs and paid periodically. BNPL is also called as “Point of sale instalment loans”.
When prescribed period ends the amount will be auto debited from the customer’s account. If the customer fails to make the payment within specified due date then interest or late fee might be charged on balance due as per the issuer’s terms and conditions.
Difference between BNPL, Credit card and EMI
Image source: Money control
Amid the pandemic many people shifted to online shopping. While there are only 3 crore credit card users in India, shoppers looked for interest free credit on online platform. This gave rise to fintech firms like Simpl, Lazypay and 31 other BNPL platforms in India. Other companies like Flipkart, Amazon, Byjus, Unacademy have with partnered with fintech focusing on BNPL or facilitating such transactions on their platforms.
BNPL gives flexible repayment options, smaller payment options and an option to build credit score. Customers should understand all the terms and conditions of BNPL plan that they are opting for, as different firms have different plans and different interest rates for failure of payment on the due date. BNPL also induces impulsive buying behaviour in people.
Mechanism of BNPL:
BNPL companies earn their revenue or income from both- the customers who purchase using the BNPL facility and the sellers of the goods and services to such customers.
Fees: The sellers pay BNPL companies a fee or a commission, if the customers use the BNPL facility to purchase their goods and services. Such commission could be between 2% and 8% of the amount of purchase made by the customers.
Marketing: BNPL companies also make money, through various marketing or promotional spend, by solidifying their positions if the seller is able to increase conversion or traffic.
Interest: BNPL players make money by charging an interest from the customers. The interest rate could be ranging between 10% and 30% of the credit amount. The interest rate is fixed based on the customer’s credit score, repayment tenure, etc. However such an interest is not charged to the customer if the amount is repaid on time.
Late fees: There are customers who may not be able to repay the amount by the due date, on which a late fee is charged. The late fees paid by the customers is another source of BNPL company’s revenue.
Pros and Cons of BNPL
* Accessible to people without credit cards
* Flexible terms (depending on providers)
* Interest-free payments, easy to sign up
* Easy & instant online process attractive to millennials
* Default in payment can affect credit score
* Have to be ready with the amount before repayment due date
* Default in payment results in interest costs.
Experts suggest using BNPL option only when one can pay on time but not to use this option for things one won’t purchase with cash as it might affect their credit score. These loans extend one’s credit without imposing steep interest charges but with a repayment schedule. But the customers should consider whether the payments are affordable and the penalties one may face if they’re unable to pay. The fine print of the terms and conditions of BNPL should be read and understood carefully before using the BNPL credit facility.
II MBA, DSCE