The pandemic-induced economy has expanded the credit market in India with 64 million credit cards issued in the past year. But the credit penetration rate remains at 5% of the country’s population which has resulted in multifold growth of BNPL (Buy Now Pay Later).
The current year has been promising for BNPL in the Indian economy. The surge in e-commerce and online shopping during the pandemic has further projected the growth of the BNPL market from a share of 3% to 9% in 2024.
As a lender, the opportunity for digitizing your credit ecosystem is plenty but how’s this going to benefit you?
Read on.
Buy Now Pay Later (BNPL) is short-term financing or credit option that allows the customer to make purchases and pay installments at a future date without paying extra charges. In layman’s terms, a consumer wishes to buy a product. He makes use of a Buy Now Pay Later option and makes the purchase where he need not pay any or lower amount at the time of purchase. He could pay the balance later on a particular date at a rate as agreed at the time of purchase.
Lenders providing the BNPL service can cut overhead costs incurred by availing Credit EMI, which increases the profitability and ROI as a whole. They can further increase their revenue by charging processing fees for this service. Let us see how it works.
Before getting into the profitability, let’s quickly understand how this benefits both the borrowers (consumers) and lenders.
Due to the fact that there are thousands of transactions taking place between lenders and borrowers every day, this data provides the foundation blocks towards building a sustainable integration of BNPL modules into lenders’ Loan Management Systems. The financial institution or lender gets access to the borrowers’ credit information which can be utilized for cross-selling other financial products.
Using the data available and analyzing the customer pattern, the bank or NBFC will be able to supply the right product at the right time and earn ROI of approximately 2.5% to 8% (Subvention Rate & Processing fees) or more than 15% returns depending on the volume of their businesses.
As a lender, what are the different ways BNPL can be applied to your consumers? Let’s walk through the nuances of BNPL with the help of some common use cases.
Raj wants to purchase an iPhone worth 65,000 INR which has been on his wishlist for quite some time. He explores different credit options available for his product within his line of credit.
Let’s assume Amazon is the seller here offering BNPL service for the product he wishes to purchase.
Here are a few ways for a Lender to offer a BNPL service to Raj.
In the first scenario, Raj checks for his credit limit based on which he will be eligible for the BNPL service. Based on his financial data, the lender will set a credit limit. He then purchases 65,000 INR by paying a processing fee.
The lender sets the due date for repayment of Raj’s credit via BNPL and makes the payment on or before the due date.
In a nutshell, the Lenders can earn 2% processing fees on each transaction and scale their profitability. Even 1000 transactions in a day, similar to Rs. 65,000 each can fetch them an ROI of 25% considering a 30-day repayment period.
In this scenario, Raj’s credit limit is set, and he purchases the product by paying a processing fee. When he’s unable to make the payment on or before the due date, he requests the lender for an EMI option.
The lender converts the repayment option as an EMI, which must be paid within a stipulated period. The EMI levied on this Credit method could be interest-free, or have a small interest rate, according to the lender’s business policy.
The profit margin may look a bit squeezed in this case, but it prevents the customer from defaulting and brings down the recovery cost for the lender.
In this use case, as mentioned above, the lender will earn interest or if the lender defaults, then finance charges are applied on the outstanding amount, which adds to the charm of BNPL. In the case of zero-interest EMI schemes, usually, the margins are built into the cost of the product itself; for example, if the iPhone costs INR 65,000 if you pay 100% up-front, it may cost you INR 66,000 if you pay with an EMI scheme.
In the third scenario, Raj’s line of credit is analyzed, and he makes a purchase by paying a processing fee. A due date will be set before which he should ideally make the payment. If he fails to pay on time or has surpassed the due date, the customer default occurs. The default fee could further be charged post which the payment method will be converted as an interest-free EMI. Let us look at this use case:
For example, 6 months EMI for 65,000 will be Rs. 10,617
This scenario is important to be addressed because the customer defaulting on the payment will cause unexpected loss to the Lender’s revenue. The customer’s creditworthiness is to be vetted thoroughly to avoid these kinds of scenarios.
Usually the 5 C’s of credit underwriting (Capacity, Capital, Collateral, Character, and Conditions) are golden eggs to determine the creditworthiness of a customer, however, these days alternate data has come into the fore to aid further checks. Metrics like purchasing behavior, social media searches, online subscriptions, and more have taken credit decisions by storm and provided lenders with more useful information to cut their losses and maximize profits. A robust Fintech Integration will give enough data access to assess customers creditworthiness to ensure better credit underwriting to minimize such losses.
The fourth scenario highlights the situation where Raj pays the Minimum Amount Due (down payment) and converts the remaining amount into EMI
It is a textbook scenario where one can avail BNPL EMI for the Total Number of Purchases made.
The fifth scenario shows utilizing the available Line of Credit (LOC) to pay off the debts and opt for a BNPL EMI plan to clear his outstanding amount. Through this method, the customer can redeem his credit limit and reduce his overall cost by a fair margin, thereby avoiding bad debts.
For example, 6 months, 0% EMI for 65,000 will be Rs. 10,834.
In this scenario, Raj starts with using his line of credit worth INR 15,000 to partially pay for the iPhone and fund the balance using an EMI option. Accordingly, his LOC is debited, reducing the limit to zero, and reducing the outstanding amount for the phone to INR 50,000. He gets an interest rate of say, 2% on the LOC that he has to repay in the agreed terms with the lender. For the balance iPhone amount of INR 50,000, he chooses 6-month EMIs. This process makes it easy for Raj’s repayment as his INR 15,000 gets a lower interest rate, and the INR 50,000 gets a 3.5% interest rate.
In the above scenarios, the lender takes a cut of interest (Subvention) ~< 1.5% per month (Rs. 975 per month (1.5% of Rs. 65,000 plus the Rs. 1,300 Processing fees)). The customer, in turn, has to pay only Rs. 1,300 compared to the hefty interest rates that he pays to Credit Cards. This is probably one of the principal reasons why BNPL is gaining popularity in an economically upgrading country like India.
Further, the process mitigates the risk of loss if the customer defaults to nil. The Lender is highly benefited with the scope of repeat business which promises a minimum ROI of 1.5%, as mentioned above.
The above-explained scenarios strongly recommend lenders to have a digitalized Loan Origination System (LOS) like CloudBankin to analyze the creditworthiness of the borrowers and prevent losses due to customer default. Further LOS implementation also provides infinite access to customers’ financial data which opens opportunities for a lot of data-driven financial products.
If you are a Lender who wants to drive the ROI and scale your business through BNPL, then get in touch with us today for a digital transformation. Let’s do it the CloudBankin-way!
It’s no doubt that Digital Lending Apps have taken the
A family in need of an emergency fund to cover
In this blog, we will unravel the mystery of data
© 2024 LightFi India Private Limited. All rights reserved.
(Formerly known as Habile Technologies)
After smartphone penetration, people are not watching their SMS at all. They use SMS only for OTP related transactions. That’s it.
But What can a Lender see in your SMS after you consent to them?
Lender can see income, expenses, and any other Fixed Obligation like (EMIs/Credit Card).
1) Income – Parameters like Average Salary Credited, Stable Monthly inflows like Rent
2) Expenses – Average monthly debit card transactions, UPI Transactions, Monthly ATM Withdrawal Amount etc
3) Fixed Obligations – Loan payments have been made for the past few months, Credit card transactions.
It also tells the Lender the adverse incidents like
1) Missed Loan payments
2) Cheque bounces
3) Missed Bill Payments like EB, LPG gas bills.
4) POS transaction declines due to insufficient funds.
A massive chunk of data is available in our SMS (more than 700 data points), which helps Lender to make a credit decision.
An interesting insight on vehicle loans for lenders.
A trend we are seeing today – the first-hand vehicle ownership is decreasing with time. Why? People are upgrading their vehicles in every few years because of technological advances. And, this can be seen more with the millennial generation.
So, what should a lender do in terms of financing?
– Estimating the residual value of the vehicle at the start of the financing period.
– Charging a borrower only for the residual value (which is the difference between the value after a few years and the current value)
Example: A bike currently is INR 1 lakh. You want to buy the vehicle for 2 years. A lender will estimate the residual value of that bike today and what it would be after 2 years. If the estimated residual value = INR 45,000, the lender will charge you only that (say, INR 55,000 with interest for this instance) during your tenure.
At the end of 2-year period, you have 3 choices:
1. Return the bike and upgrade to a new one without going through the struggle of selling it.
2. Pay the lump sum remaining amount to own the vehicle outright.
3. Extend the financing and own it by keep paying the EMIs for the remaining amount of the vehicle for the next 12 or 18 months.
Benefits for the borrowers?
– Flexibility to use a vehicle and upgrade to a new one.
– Affordability to not pay for the complete value of the vehicle with the intention to use for a lesser amount of time.
– Convenience in owning the vehicle.
Say goodbye to the old lending option and embrace the new way of financing for vehicle by lenders!
How many of us know this?
1) Tiktok does Lending ( is it an entertainment company or social media company or a fintech company?
2) Youtube China does Lending
3) Top 100 internet companies in China(no matter what business they are in) do Lending
The team which was heading Lending in Tiktok was the Advertisement team. If we do Ads, we do X no of revenue. But if we do lending, we’ll get X+30% more revenue. This is on the same Ad spot.
Ad team has transformed into a lending team, and in today’s world, it’s possible because the subject matter expertise can be put in as an API and given to you.
Embedded Lending as a service is becoming popular in India too, and I am happy to be part of this ecosystem.
The answer is No. Only the top 10 crore people have access to many credit products in India. Almost all Banks focus on this market.
Once you go beyond that, the credit access rate has dropped significantly due to multiple factors.
1) Customers who are having low income(30-40K per month)
2) Not earning from an employer who belongs to Category A or B
3) Not from Tier 1 or 2 cities
NBFCs and Fintechs focus on the above segment, pushing another 10 crores of people.
But in India, 70 crores more people are formally or informally employed, which still needs to be tapped.