BNPL (Buy Now, Pay Later)- The Modern Credit Boon or Curse

How does BNPL work?

This short-term financing allows you to make a purchase and pay for it in instalments in a pre-defined period. Millennials and Gen-Z are opting for it as an alternative for high-interest credit cards or personal loans. Pay Later, unlike a credit card or a consumer loan, charges zero interest on purchases so long as the repayment is made with in the stipulated period. The modern credit system has no specific rules to keep a cap on its lending yet. With booming online shopping, it is becoming the future of transactions. Many industry players, including food delivery apps to D2C brands, have already added various Pay Later brands as payment options.

Why are millennials and Gen-Z choosing BNPL over other payments methods?

Millennials and Gen-Z are all about flexibility, and that is what Pay Later options are giving them. It allows them to pay back at their convenience and plan their finances accordingly. It is an additional line of credit that gives these consumers a chance to live a desired lifestyle at the expense of tomorrow’s money. Another reason for choosing it is the availability of easy credit with minimal to low dependency on credit rating to get it. Though the number of credit card approvals has increased over the years, financial institutions have not been able to cater to the credit appetite of Indian consumers, especially with millennials and gen-z entering the fray.

What does the data say?

As per a report published by Indian Buy Now Pay Later player ZestMoney in 2021, twice the number of millennials and thrice the number of Zoomers have started using BNPL on merchant platforms. There is a 55% increase in fashion-based transactions and a 50% increase in travel transactions in the last quarter of 2021. While tier-1 cities saw a marginal jump in its adaptability, tier-2 and tier-3 cities were not behind. Smartphones and electronics were the most bought item, followed by travel and fitness. It is safe to say that people prefer to spend more on leisure activities, upgrading lifestyle, and upskilling. With an average of 3.5 million customer base in 2021 spread over online and offline retail, Pay Later payment method will expand its customer base to an average of 26 million over online and offline retail by 2026, resulting in six times growth.

Is it worth?

It has changed the way we shop. Whether it is new electronic items or new accessories, it has given the millennials an edge for living life on their terms. From a distance, BNPL looks promising, right? But much like everything else, BNPL also has its pros and cons. So, before stepping into this maze, it is crucial to understand the pros and cons.

Pros

• Approval is a few clicks away
• No hidden charges like credit card
• Hassle-free
• Easy payment plans
• No interest
• A better alternative than a credit card
• Auto payment set-up

Cons

• May encourage impulse buying
• May negatively impact your credit score
• Spending based on future income
• High overdue payment fee
• No payment date flexibility
• Payment limit

Conclusion

Bottomline, everything comes down to financial discipline. Though it seems like millennials and gen-z have it all under control, the future of success of BNPL relies on how smartly and carefully the people manage their finances with this extra line of credit. Financial literacy can ensure positive spending behavior. While responsible lending and the correct usage of this credit line can ensure the success of BNPL, irresponsible credit behavior can land the millennials and gen-z in trouble, impacting their credit score and eventually making them risky borrowers of the future. While we are yet to see the trend of defaults on BNPL repayments in India, a recent article published by Reuters on BNPL repayment trends in the US is a bit alarming if not scary. The survey reported that a third of BNPL consumers defaulted on one or more payments and a large majority of them saw a negative impact on their credit rating.