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Thursday, November 30, 2023

How BNPL Can Be a Disaster for GenZ? What RBI is Doing? 

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Buy Now Pay Later (BNPL) is a scheme for customers to purchase items without having to pay for them instantly. You can consider it as a form of a zero-interest loan. You can pay for the item in 3 months or 90 days and the tenure could vary depending on the lender. 

In digital retail, BNPL or Buy Now Pay Later is becoming ubiquitous with each passing day. You must have heard that the number of users of BNPL providers like Afterpay, Affirm, Klarna, etc., are also rising steadily. It is possible that you, too, might have used or have considered using BNPL at some point in time. 

However, knowing about BNPL or availing such services would never answer the finance industry’s burning questions, such as about its customer base, longevity, or future.

BNPL and Gen Z

The notion that is currently accepted is that a younger cohort of users is carrying the BNPL phenomenon, that is, the Gen Z. Even though it is true, it is not right to drive home the stereotype that the fashionable generation of twenty-something-year-olds want instant gratification on things that they can’t “pay now”. 

It is important to remember that just like any other generation, Gen Z is a community of people with their own goals and aspirations, encompassing a vast landscape of financial proclivities. 

It is essential to recognize that Gen Z is needed to further their knowledge and understand the future of BNPL and other financial services. 

The question arises about whether BNPL can be disastrous for Gen Z since it is believed that the primary consumers of BNPL are younger people or teenagers. In addition, there are several other myths surrounding this financial service. 

However, it is noteworthy that the issues at hand are more significant than the disruption of BNPL or whether it can be disastrous for BNPL.

According to surveys, though this financial service – BNPL is indeed weighted towards younger generations like Gen Z and millennials, the number of boomers who use BNPL are not entirely negative. 

It is a fact that millennials and Gen Z are about twice more likely to avail services like BNPL. However, over a third of the population of boomers would still consider using BNPL. 

Thus, while there is undoubtedly a gap in the number of younger versus older users of BNPL, this financial service is still being accessed by every age group. 

Most of these users regard BNPL as not a payment option merely but as their first choice for any payment.

People generally assume that most users of BNPL would have low-income. However, surveys suggest that up to 58% of high-income shoppers not only use BNPL but also prefer it as their first option for payments. 

Another myth surrounding BNPL is that people mostly use it online or to shop for clothes. Fashion ranks 4th when it comes under the category of BNPL purchases, while electronics rank first. 

Moreover, most people would also prefer to use BNPL to pay for purchases at local businesses if they had the option.

BNPL in the context of the Indian Market and RBI

At present, the worth of the Indian BNPL market is around 3 billion dollars, and it is one of the fastest-growing markets in the country. It is estimated to be worth about 45 billion dollars by 2025. 

The most prominent players in the Indian BNPL market are LazyPay, Simpl, Ola Pay, and on the other hand there are fintech companies that are trying to augment BNPL with Neo bank creating a savings-based BNPL alternative like UP, an Australian neo banking company. And India is definitely trying to hail with its own merger of neo banking and BNPL very soon.

We all have witnessed the truth, that BNPL and Neo Banks are the most successful drivers of the fintech industry turning banking and lending into a megatrend in the post Covid world . One would think that since Neo bank is such a big industry, there would be stringent regulation. But, is it so? It might be in a gray area according to the authorities, but do we see any alternatives to these rising fintechs? 


Shifting Sands 

In a recent directive, RBI stated that the uncertainty with BNPL companies and their business models. Therefore, it has been looking deeper into these companies’ revenue generating models. 

The central point of investigation of the RBI is how they have been extending credit lines to their customers via Prepaid Payment Instruments (PPI). There is an apparent lack of system and administration, transparency, or licensing. 

Therefore, RBI is looking not only into the cases of BNPL companies but also at small banks and non-banking fintech lenders that use PPI to extend credit lines or fill their wallets.

One of the trickiest things about BNPL is debt. Even though it is a convenient option for payment, most financial institutions would start a loan account in your name if you opt for BNPL, which goes in your credit history. This leads to a small debt added to your credit score. Moreover, if you fail to make the payment on time, you will need to pay interest of up to 30% or 40% per annum. 

In India, it is observed that most people who opted for BNPL are Gen Z with no credit score. They also do not always have jobs to pay off these loans and consequently fall into financial stress. 

It is thus a responsible move on RBI’s part to tighten its fist around these loose financiers. And it is equally important for the central governing bodies to bring in educational policies that ensure a fundamental education of finance and money management for the kids and teenagers from a very young age. This will evoke and raise a generation of money-conscious and financially wise teenagers. 

Since we were in the context of Neo bank, we should also appreciate, India’s first ed-fintech start up, Akudo, that aims to educate Gen-Z’s through their learning first neo banking model, that encourages teens to enhance their money management skills over time through a gamified environment, that is both educational and fun.

Take away

BNPL is a financial service that can have a substantial radical impact on the behavior of consumers. Its effects on e-commerce and disruption of payment industries and credit cards is visible already. 

However, most people are wary of such services due to the lack of transparency. But let’s be sure that new technologies will arise, and the application and usage of BNPL might become smoother and more seamless, encouraging even more people to opt for it. 

This paradigm shift in financial services might lead more people to adapt to BNPL, making it even more mainstream.

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