Looking to extend the credit limit on Buy Now Pay Later platforms? Here’s what you need to know

Buy Now Pay Later (BNPL) has seen a huge increase over the past 18-24 months. Designed to revolutionize the shopping experience for customers, this digital credit product is quickly becoming the preferred payment option for online shoppers in India. BNPL is particularly attractive to young clients because of its low-cost or no-charge interest options.

Fueled by the growing demand for e-commerce, BNPL in India is poised to more than increase tenfold in the years to come. According to research estimates, the market will grow from the current $ 3-3.5 billion to $ 45-50 billion by 2026, as an ever-increasing number of online shoppers take advantage of the option of interest free credit.

What does BNPL offer to young clients?

The main attraction of BNPL is that it increases the purchasing power of customers, who can spread their payments into low-cost (mostly interest-free) installments. This one-click credit facility can be used when paying on merchant websites and apps. Starting with e-commerce marketplaces, BNPL companies collaborate with everyone from food delivery apps and EdTechs to travel aggregators. Customers use BNPL to finance the purchase of cell phones, book airline tickets and also do their daily groceries.
Using digital KYC and subscription models, BNPL is able to offer a fast payment process and instant access to a line of credit for customers. This enhanced online payment experience is appealing to a country that is the digitally smartest country in the world.

Not only is India home to a large population of digitally savvy young professionals, it is also greedy for credit. The country has a large population of new credit clients who do not have access to formal credit. A 2019 study by TransUnion CIBIL found that only 147 million people out of 609 million people under the age of 24 were eligible to apply for credit. BNPL has universal appeal, but also responds to the specific needs and challenges faced by new credit clients.

Alternative data and proprietary algorithms used for credit limit activation

BNPL providers are leveraging AI, ML, and automation to effectively solve the problem of small to large-scale lending. The exponential reach also facilitates financial inclusion, as the product breaks down geographic and economic barriers.

The increased penetration of mobile and internet has provided huge opportunities to leverage data analytics to assess the risk profile of underserved borrowers. Several data points such as bill payments, shopping behavior, social media footprint and others are used for subscription purposes. Metadata analysis provides insight into a customer’s spending habits and their intention to reimburse.

These alternative sources of data allowed new age lending models to determine the eligibility of these borrowers more quickly, which led to the creation of an instant credit facility like BNPL. Plus, because AI and ML are able to process large volumes of data in real time, information is being generated faster than ever. This has helped BNPL’s suppliers significantly reduce lead times.

Extension of credit limits on BNPL

The most important thing to keep in mind is that BNPL is primarily a credit product and therefore rewards clients who meet their repayment schedule. Customers who demonstrate good repayment behavior are gradually and systematically offered higher credit limits. Paying on time is viewed positively by lenders, who are willing to trust customers with larger lines of credit.

Optimal use of the credit facility is also viewed favorably by BNPL companies. When customers use BNPL regularly, they often receive extensions on their line. Vintage also plays an important role. Customers who have been using BNPL for a longer time are usually offered an extension.

BNPL providers have a 360-degree view of their clients’ consumption habits and borrowing behavior to ensure responsible lending. Non-repayment is reported to the credit bureau, thereby deterring bad repayment behavior. Non-payment or late payment of dues impacts a client’s credit rating, compromising their prospects for loan approval in the future. Customers with low credit scores may be offered BNPL, but given the risk to the lender, these customers often have to bear a higher interest rate. For starters, new customers are offered smaller credit limits. As they increase their use of BNPL, the limit is gradually increased.

Global phenomenon, BNPL is revolutionizing online shopping in India. Customers are increasingly adopting the product, taking advantage of the many benefits it offers. With an informed approach, clients can use BNPL to seamlessly meet their needs and aspirations.

The author, Akshay Sarma, is CFO of Capital Float. Opinions expressed are personal

(Edited by : Anshul)

First publication: STI


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