Buy Now Pay Later: A Frightening Trend
The disruption in the payments world triggered by the virus scare has provided a huge fillip to Buy Now Pay Later (BNPL) schemes that are becoming increasingly popular among online shoppers the world over. Prevalent mostly in the retail sphere, BNPL is slowly getting into other domains like travel that are struggling to recover losses.
Credit cards and EMIs as deferred payment schemes have always been popular. But when Amazon, PayPal, Flipkart, Afterpay, Openpay, Clearpay, Klarna and a host of others made BNPL available at checkout, a section of shoppers simply swooped it up. BNPL schemes do not have to run credit checks, and the balance owed does not appear in any bank statement, giving the illusion that there is no debt at all - which is really a debt trap. While many shoppers utilized the scheme to manage their financial hardships during the lockdowns, for others it has been just a way to possess things that were pricey or previously out of reach. Swedish Fintech Klarna, the leader in this space, grew its BNPL customer base by more than 16 million in 2020 across the US and Europe by allowing customers to delay the entire bill for their chosen item/s or stagger payments. Targeted mostly at young women craving the latest clothing line, skincare or accessories, Klarna advertised BNPL as a way to lift moods during the lockdown by investing on emotional health! The Advertising Standards Authority was in fact forced to ban an Instagram campaign by Klarna for “irresponsibly” encouraging customers to use their BNPL service to cheer themselves up during the pandemic. Klarna markets itself as a “healthier, simpler and smarter alternative to credit cards”, that young shoppers fall easy prey to and end up paying insane amounts of late fees.
That said, BNPL has become hugely popular among those managing with tight budgets during the pandemic. It has definitely helped a section of the population to defer payments even without a bank account, for purchase of essentials. A larger part of the spending however is going towards conspicuous consumption - non-essentials such as electronics - giving retailers a way to maintain cash flows.
Then there is the issue of Terms and Conditions (T&C) that nobody reads. It has been found that BNPL T&C detailing financial risks can take up to an hour to read. And very few of those who do read can actually understand exactly what they are agreeing to. It is vital that these terms are made using concise and easy to understand language and should describe upfront various scenarios with examples of loan amounts and interest payable/late fees over different time periods if amounts owed are not paid back in time.
There is no doubt that there an urgent need for regulating this space. The UK is planning to regulate BNPL to protect its customers, making it mandatory to check if customers can actually afford what they are wanting to buy. Regulators are also focusing on the need to confirm user identities. This would make it a lengthier process for first time shoppers, but as of now the new rules are not rigid enough to have any major effect on Klarna and the rest. Currently rules are limited to specifying the clarity of presenting BNPL options at checkout, or to compulsory reporting of BNPL providers to a central agency when assessing how much a customer can afford.
But as regulation becomes stricter, BNPL providers will need to invest on dynamic real-time processes such as KYC, AML and credit history if they want to retain customers while adhering to the new rules. This is where Open Banking can help if customers permit access to their bank accounts, and national identity databases can be used to quickly confirm the identity of buyers. As expected, there is a new group of software players who are working on providing automated solutions for BNPL life cycles in anticipation of more rigid BNPL compliances.
It remains to be seen how regulation - especially in India where digital payments are being given a huge push by the government - will evolve without stifling the business model while providing the much-needed relief to customers in these difficult times. India’s digital payments behemoth Paytm has just announced a Postpaid Mini service that offers 30-day interest-free small-ticket loans (Rs 250 – Rs 1000) to help people make payments for bills, recharges and other daily or monthly needs. Other than helping people manage their liquidity during the pandemic, Paytm hopes to help new-to-credit citizens start their credit journey and develop a financial discipline.