Buy Now, Ponder Later?

BNPL - the blue-eyed boy of digital lending did not grow up to be the star achiever it was deemed to be. With the ZestMoney founders quitting, it might be time to reflect on Buy Now, Pay Later - what was right, what went wrong - and what’s in store for the future.?

Why did BNPL catapult into success:?

1. Ease of use was a big factor - According to a Bain report, BNPL had the highest Net Promoter Score vs other forms of consumer credit. Spearheaded by tech-first LSPs, BNPL truly showed the world how lending can be customer-centric!

2. Perceived as the cheaper option to other forms of consumer credit: Consumers always found the option of buy now pay later, very cheap and lucrative: ‘What’s not to like?’ was a common sentiment of consumers. Some of the offerings around buying now and paying in installments truly created a major impact in boosting discretionary online purchases in India.?

3. High merchant adoption due to increase in order value: The online platforms and merchants had a big role to play in democratizing BNPL - without them this model wouldnt work. And the increase in order value and no. of orders, made BNPL a win-win-win for the consumer, merchant and the lender - until cracks started appearing.

What were the cracks that widened continuously to engulf the segment into a hot molten crisis:?

1. Defaults and missed payments :

While BNPL solved for the ease of availing the loans, the repayment leg was built on shaky grounds of customers making repayments from their apps. Borrowers would end up using multiple BNPL apps and lose track of their repayments. The repayment rates of BNPL were significantly lower than credit cards.?

2. Recovery was a nightmare:?

There was also an increased trend of willful default in BNPL - I have first-hand heard people say they made a purchase and deleted the app - coz, why bother?? The recovery of small ticket default ended up being a costly affair for the lenders. While in the growth stage of BNPL, with an optimistic outlook, things were overlooked - but as the market took a downturn,?this started pinching hard.

2. Impulse purchasing of new to credit borrowers:

A key reason for the breakdown of the PhonePe- Zest deal was the quality of the loan book - the focus on convenience and the flexibility towards new to credit borrowers resulted in compromising on the basics - borrower quality and purpose for the loan. Borrowers who spent beyond their limits, did not have the ability, motivation and discipline to repay.

Does it mean it is time to write-off BNPL? My personal opinion is - NO. However, a few changes would probably happen:

1. BNPL would go through a consolidation phase with a few big players standing at the end - this would ensure reduction of the one too many BNPL apps conundrum that consumers face today. There will also be a bigger role that Payment Aggregators will play in BNPL - with the strong synergy in the customer payments journey
2. BNPL as an industry is revisiting their loan books and their fundamentals - and the high availability of spend data on ecomm platforms, and AA coming in, I am confident they would rise from the ashes and have resilient underwriting models to complement their customer-first disbursal approach
3. Since BNPL has shown the way for customer centric disbursals, traditional lending would continue to move towards BNPL as a form factor - case in point is gold BNPL?
4. B2B BNPL continues to rise - with players integrating with ERPs, B2B platforms and creating custom journeys for MSMEs to buy on credit
5. Offline BNPL is also on the rise - this shows continued resilience and faith of the lending industry on the viability of the model, although it is important to learn from the mistakes of online BNPL and build judiciously

On a closing note, like any other disruptive innovation, BNPL is going through a temporary downturn cycle before reaching sustainable growth. The macro indicators still are in favor - Indian consumers will continue buying more online, and convenient access to credit at the time of purchase is a no-brainer. The good debtor vs bad debtor prediction is to be solved for. Now is the time for the digital lending industry to innovate on overcoming this obstacle - and for this, collaboration with payment providers, e-commerce players, Account Aggregators, data science players, and above all, the regulators, is the key to success.