Dialling back to the present, I find that plastic cards are fast losing their sheen to more futuristic options. Millennials (aka Gen Y, the demographic cohort born between 1981 and 1996) and younger (Gen Z) are increasingly turning to ‘buy now pay later’ (BNPL) apps on their smartphones for instant credit. Whether ordering pizza on Swiggy, a face cream from Nykaa or a dress from Myntra, customers have multiple BNPL options available while checking out. Big online marketplaces like Amazon and Flipkart offer ‘white label’ BNPL products in partnership with banks and NBFCs like Capital Float, IDFC First Bank and ICICI Bank. There are also many fintech companies such as LazyPay, Simpl, Zest, Bullet and Paytm, who have embedded their BNPL product seamlessly into big digital marketplaces and apps / websites of digital-first consumer brands.
Data on e-commerce payment modes indicates that credit and debit cards are losing share to UPI, digital wallets and BNPL. BNPL, particularly, has seen exponential growth from 1.6% market share in 2019 to 3% in 2020 and is expected to grow to 9% by 2024, according to data from venture capital firm Lightbox. Many fintech apps now provide the option of BNPL on top of UPI payments, which is the most-used payment mode in e-commerce. BNPL is also becoming increasingly popular in offline modern retail where it is available on debit cards through POS machines from merchant platform companies such as Pine Labs.
Now why would someone prefer using a BNPL option versus a credit card? Firstly, to use a credit card for financing a purchase, you would need to apply to get a credit card a priori, and wait for a length of time to have it approved and delivered at your home. You will also need to provide documents to demonstrate a stable income.
Compared to that, BNPL options provide instant gratification. Banks and fintechs providing BNPL options underwrite customers on the basis of digital information available in real time via APIs rather than salary slips and bank statements. This digital information includes credit history recorded with bureaus, payments history on payment platforms, or even smartphone data footprint. If you already have a credit card, BNPL offers a frictionless one-tap checkout experience, whereas credit cards require OTP confirmation.
Also, BNPL is more consumer friendly when it comes to cost of financing. More than 60% credit card users in India end up using their credit card as a ‘revolver’ or convert credit card balance into EMIs with a high rate of interest. Credit card ‘revolvers’ refer to customers who are unable to pay full dues in time and end up paying 3-4% monthly interest on their outstanding balance. In comparison, BNPL apps have zero interest EMIs and a late payment fee which is capped at a certain percentage of the principal. The bulk of their business revenues come from the brands / merchants who are happy to pay them a certain commission for the increased revenue that they get by providing this option to customers at their store / website.
BNPL is a more inclusive financing option than credit cards for gig workers. Gig economy refers to short-term contracts or freelance work as opposed to permanent jobs. There is a huge workforce comprising delivery workers, drivers, call centre contractors and more who are part of this gig economy. Gig economy workers tend to have chunks of income than stable periodic income, and therefore are not eligible for regular credit cards.
Now consider this: data from Lightbox shows that credit card penetration in India is only 3% with close to 35 million unique credit card customers in India. In contrast, smartphone penetration in India is at roughly 38% with an estimated 500-million-plus smartphone users, according to December 2019 data from research firm techARC.
The pandemic has also fundamentally altered our consumption and working habits with a tremendous growth in e-commerce, adoption of marketplace platforms and the gig economy. Join all the dots and you have the ‘perfect storm’ for BNPL to massively outpace credit cards, being a state-of-the-art convenient, consumer-friendly and inclusive option.
To conclude, there is a very strong likelihood that millennials who are non-credit card users today and Gen Z (demographic cohort born between 1997 and 2010) who are digital natives will skip credit cards and leapfrog to using BNPL options on their smartphones.
Ayush Mittal is a champion of the transformative potential of technology and artificial intelligence on consumer finance.
Views expressed are his own.