Many of us look forward to the holiday season deals to make big purchases. This is also the time when companies release great deals and discounts to bring cheers to their customers. While many people have credit cards to make the most of these offers, for those without access to formal credit due to a lack of credit history, the option lies in Buy Now. Pay Later or BNPL.
BNPL has recently become a popular payment method as it allows its customers to split the total purchase cost into monthly installments using the facility. Here, the payment is made by the BNPL player to the merchant, which is then refunded by the customer in the form of zero cost EMI.
“BPL is a kind of instant, no-fee funding that has grown in popularity, especially during the Covid-19 pandemic. These short-term loans are also popular with consumers who are not normally eligible for credit or financing but still want to take advantage of the benefits,” said Ashish Misra, COO, Retail Banking at Fincare SBF.
Simpl, LazyPay, Amazon’s Pay later, Mobikwik Zip, Paytm Postpaid, ZestMoney and Early Salary are all examples of fintech players promoting this new digital credit line to retail customers.
Types of BNPL
There are mainly two types of digital players in the market: payment financing and transaction financing. For example, in the case of BNPL players like LazyPay and Simpl, you don’t have to go through the lengthy process of adding credit cards or money to the wallet or waiting for an OTP. You can simply accumulate all your bills and only pay one bill after a certain number of days, which is transmitted to the BNPL account. “Payment finance players typically have integration with smaller merchants like Swiggy and BigBasket, where the average ticket size is much smaller. They kind of give a cash advance to their customers without the need for documents KYC,” said Vimal Saboo, Chief Commercial Officer of EarlySalary.
Then there are players like CapitalFloat, ZestMoney, and EarlySalary that allow users to shop online and pay later through EMIs. “We offer transaction finance for large purchases from merchants, including purchase of insurance policy, where reimbursement can be made in EMI. The average ticket is much higher, up to Rs 1 – Rs3 lakh as we are backed by NBFC and also as per RBI regulations we require clients to upload their KYC details,” Saboo said.
Things to know before taking advantage of the BNPL facility
Since it’s the start of the holiday season, many of us are tempted to make big purchases. But, before you take advantage of that easy cash, here are a few things you need to know about the new line of credit:
Most BNPL programs are available with interest-free credit, as fintech companies tend to pass on the discount merchants receive to customers in the form of zero-cost EMIs. The interest-free period can vary from 15 to 30 days, beyond which the customer has the choice of paying in one go or in several instalments.
However, few transactions for which no incentive could be offered by merchants, such as payment of insurance premium, BNPL player may charge 15-20% annually of the amount. Similarly, in the case of payment finance players, all online spending is consolidated into a single account where the balance must be cleared every 15 to 30 days.
What happens if you are in default?
You will be charged two types of fees if you miss the payment. First there is the late payment fee which can range between Rs 500 and Rs 1000, then there is the penalty interest rate of 2-2.5% per month. “Depending on the type of plan you choose, there will be higher fees and interest if you end up not paying installments on time,” Misra said.
Can the merchant blacklist the defaulting customer? “The merchant has no say in financing the transaction. Generally, lenders have no recourse over merchants. So the merchants won’t come back to the consumer,” Saboo said.
You may have trouble getting a refund for something you bought, whether it’s faulty or unsatisfactory. It is therefore important to be sure of what you want to buy as merchants may have terms and conditions related to the cancellation or return of the product. “Sometimes the finer details of these loan programs are not clearly understood or transparent and one may be able to easily access help if something goes wrong,” Misra said.
Last but not least, given the access to easy money, there is a risk of getting carried away and gorging. Therefore, it is always advisable not to stretch too much and to buy more than you can afford.