Buy Now Pay Later or BNPL services are gaining popularity in India and around the world, thanks to easy access to credit. In a country like India, where only 5.5% of people hold a credit card, BNPL provides easy and convenient access to credit for those who don’t own a credit card or don’t have enough income to get a traditional bank loan. While the BNPL market saw rapid growth in the past years, recently many governments including India and the UK have implemented tight regulations and guidelines in this sector. Let’s try to understand the growing concern over BNPL services and what are the things you should know to make better financial decisions.
What is BNPL?
Buy Now Pay Later, often abbreviated as BNPL, refers to a type of short-term financing that allows consumers to purchase products or services and pay for them at a later date, without having to pay the full amount upfront. This type of financing option is often offered by retailers as an alternative to traditional credit or debit cards and can be used for both online and in-store purchases. BNPL providers typically set up a payment plan that divides the total cost of the purchase into smaller, more manageable payments that are spread out over time.
How BNPL Works?
Buy Now Pay Later (BNPL) works by allowing customers to make purchases without paying the full amount upfront. Instead, the customer will pay for the purchase over time, typically in smaller, more manageable payments that are spread out over weeks or months.
- The customer opts for the Buy Now, Pay Later option while making the purchase
- The customer makes a small down payment toward the purchase
- The remaining payment will be divided into smaller, more manageable payments that are spread out over time
- These payments are usually interest-free, and the customer doesn’t incur any additional charges if they pay as per the payment plan
- If the customer misses a payment, additional fees, such as late payment fees or interest will be charged against the outstanding amount
In general, BNPL providers aim to make shopping more affordable and accessible by offering customers an alternative to paying with cash or credit cards.
Advantages of BNPL
- Gives instant access to credit for those who don’t hold a credit card
- Increases affordability
- Flexible repayment tenure
- No-cost EMI option
- Less to no paperwork
- Helps business to attract new customers
Top BNPL Companies in India
- CashE
- Zest Money
- Amazon Pay Later
- LazyPay
- Flipkart Pay Later
- Paytm Postpaid
- OlaMoney Postpaid
- Simpl
- Flexmoney
- Capital Float
How Do BNPL Companies Make Profit?
You must be wondering, if BNPL companies don’t charge you any money for your repayment, then how do these companies make money?
To help you understand this, let’s assume you want to buy the latest iPhone 14 which will cost you INR 60k. However, you don’t hold a credit card yet and your savings are not enough to afford it. However, with the help of a BNPL app like Amazon Pay, you can split the entire bill of INR 60k into 6 different bills of INR 10K. Now the same iPhone 14, which was unaffordable for you earlier, suddenly becomes affordable for you. Just like you, the iPhone 14 has now become affordable for thousands of other customers.
So this way, the BNPL services
- Increases the affordability in the market
- Increases the probability of a sale
- Enable companies to sell more high-ticket products
- Enable sellers to get more market penetration
So, now in the same market, if Apple could price their iPhone at INR 60k, now they can launch products worth INR 80k to INR 100k and still be confident that their products will be sold. Now, every time the BNPL service makes such sales happen they get a commission.
Here is how the BNPL companies make money:
- Every time a customer pays through BNPL service, they earn a commission.
- They can charge consumers a late fee or interest on unpaid balances.
- Some BNPL companies may also earn interest on the funds they advance to consumers.
Why BNPL Can be Dangerous for You?
At first glance, the BNPL business model might seem like a wonderful strategy. Consumers can afford stuff that they could not afford otherwise. Sellers can sell more of their products and appeal to a larger market. So it is a win-win for both right? Sadly the answer is no.
3 Reasons why BNPL practice is dangerous:
- BNPL companies lend the money without any collateral. So, if a customer fails to pay his due amount in the future, the lending company does not have the user’s assets to recover that money.
- BNPL companies have no way to verify how many other loans the user has already taken. Users can get the required amount with minimal paperwork and without producing income proof. So, a person can take INR 10k loans from 10 different BNPL apps and easily fall into a debt trap of 1 lakh rupees.
- Due to a lack of financial knowledge, many people do not know how to use credit properly. In the race of impressing others and hiding insecurities, they often indulge in impulsive buying with little to no savings. Eventually, they default on their payments, deteriorate their credit rating, and end up cultivating terrible financial habits.
BNPL vs Credit Card
Buy Now Pay Later (BNPL) and credit cards are both forms of credit, but they have some key differences.
With a BNPL service, such as Afterpay or Klarna, you can make a purchase and then pay for it in installments, rather than paying the full amount up front. These services typically require an initial payment, and then you make regular payments over a set period of time, usually a few weeks or months. The main advantage of BNPL is that it can help you afford larger purchases or spread the cost of smaller purchases over time. BNPL facilities can be availed much more easily with little to no paperwork. However, it’s important to note that late fees and interest charges may apply if you fail to make your payments on time.
A credit card, on the other hand, allows you to borrow money up to a certain limit to make purchases. You can choose to pay off the balance in full each month or make minimum payments and pay interest on the remaining balance. Credit cards also typically offer rewards or cashback programs. The main advantage of a credit card is that it can be a convenient and flexible way to make purchases, and it can also help you build a credit history. However, if you don’t pay off your balance in full each month, the interest charges can add up quickly. Also, one needs to meet strict eligibility criteria to avail of a credit card.
In summary, BNPL is a way to make purchases and pay them off in instalments, while a credit card is a way to borrow money to make purchases and pay them off over time. While BNPL is much more convenient than a credit card, it is also very easy to fall into a debt trap using BNPL services. In the end, you should utilize your credit responsibly and develop good financial habits to live debt free.
When Should You Use BNPL Services?
- In case of emergency when you need instant credit
- If you really need to buy a useful product but are unable to pay the full amount upfront
- If you are getting a significantly better deal if you pay via a BNPL app
- When you know what you are doing
BNPL services can prove to be very useful in times of emergency and for people who don’t hold a credit card. However, don’t make a habit of using a pay-later service for your every purchase. You should be responsible for your borrowings and should know what you are doing.
What is a Better Alternative to BNPL?
At this point, we all understand how bad these BNPL services can turn out to be, yet our desire to buy a new iPhone, or get a pair of Nike Air Jordan shoes is not going anywhere. So, how to afford these without cultivating terrible financial habits?
A better alternative to BNPL is SNPL (Save Now Pay Later). Instead of taking unnecessary loans for your needs and desires, set up realistic goals based on your financial ability and save towards that.
How to implement SNPL or Save Now Pay Later?
- Set your short and long-term goals
Short-term goals could include:- Buying an iPhone
- Getting a pair of Nike Air Jordan shoes
- Planning a vacation
- Buying a diamond ring Etc.
- Long-term goals could include:
Long-term goals could include: - Buying a house
- Buying a new car
- Early retirement
- Going on a world tour, etc
- Set a realistic timeline for your goals
- Calculate how much you need to keep aside every month for your goals
- Invest in less risky investment instruments for your goals like
- High-yield savings accounts
- Mid and Large cap Mutual funds
- Index funds
- Bonds
- Short-term certificates of deposit
- Short-term certificates of deposit
- Recurring deposits etc.
- Once you achieve each of the goals, withdraw your fund and afford the things you wanted guilty free.
As a bonus, you will develop one of the healthiest financial habits by following this process.
Key Takeaways:
- Buy Now Pay Later, often abbreviated as BNPL, refers to a type of short-term financing that allows consumers to purchase products or services and pay for them at a later date, without having to pay the full amount upfront.
- These payments are usually interest-free, but users may incur late payment fees or interest charges if the outstanding amount is not paid in due time
- Gives instant access to credit for those who don’t hold a credit card and increases affordability in the market
- BNPL companies make money in the form of sales commissions, late payment fees, and interest on outstanding payment
- BNPL companies lend the money without any collaterals or verifying the customer’s other debts
- A person can easily fall into a debt trap if he/she uses BNPL irresponsibly
- BNPL should be used during an emergency when you need instant credit
- Try to follow SNPL (Save Now Pay Later) instead by setting up realistic saving goals for your desires
- Build good financial habits and aim to live debt free
