Investment Theme: Buy Now Pay Later

Buy Now Pay Later

It is undoubtedly true that the Covid-19 pandemic has accelerated the existing trend towards digitisation in India with e-commerce now expected to grow by over 80% in the next four years. However, despite the growing dominance of e-commerce, the majority of customers continue to use cash as their primary means of payment. This phenomenon can be attributed towards several factors such as safety, convenience, and access. To further exacerbate this issue is the difficulty that the average consumer faces in obtaining credit cards with the total unique credit card holders being in the 35m range, while the requirement for credit extends to over 200m people.

This is the requirement which Buy Now Pay Later (BNPL) players are looking to satisfy. BNPL is a powerful tool that provides a digital credit card experience even to those left outside the structured financial system. Not only do these companies do away with the tiresome approval processes of conventional lenders but they also provide short term interest free credit to make products more affordable for the aspirational consumer. Further, by streamlining the purchase process, BNPLs lower shopper hesitation, resulting in higher conversion rates and average order values.

However, with the plethora of advantages being provided, one must pause to consider the potential risks associated with the growth in these short-term unsecured loans. To fully explore this idea, we must first begin with an understanding of BNPL and how it works.

What is BNPL?

Buy Now Pay Later (BNPL) is a short-term micro credit model, where consumers pay little to no interest for online purchases. As such, the core tenet of BNPL service is that it enables one to pay over a period for what they choose to buy today. Typically, the credit period for BNPL services ranges from 30 days to 36 months, depending on the transaction size.

While the initial iterations of the BNPL product saw primarily lower ticket sizes with a pay in instalments model, the new models see larger ticket sizes where the consumer is pre-qualified and provided a loan which eventually gets securitised by an NBFC. In both models, the amount is paid by the BNPL service provider to the merchant, who then pays a specified fees to the service provider.  To note, the credit amount depends on the lender – for instance, while Flipkart offers a seamless checkout process for up to Rs 10,000, under their BNPL services, ZestMoney, another BNPL lender, offers up to a personalised limit of Rs 60,000.

Why is BNPL so attractive?

For Customers:

  • Transparent and frictionless platform
  • Longer repayment periods than what is offered by Credit Cards
  • Lower interest rate and avoids hidden fees associated with credit cards
  • Completely digital and instant – making it easier to apply and obtain approvals

 For Merchants:

  • Easy customer acquisitions, lower CACs, Higher retentions
  • Increased sales, Improving repurchases and higher order values (up 40-60%)
  • Credit risk is borne by Lender / Fintech partner

 Market Opportunity

While BNPL has only scratched the surface of the $22tn global payments industry, its sharp growth highlights its journey to becoming ubiquitous. Multiple agencies expect the market to reach >$700 bn by 2025 from current ~$350 Bn growing at a ~20% CAGR for the period. More importantly, during the same period, reports expect the usage of credit cards as the method of payment for e-commerce to drop from ~24% to ~21%. Mobile wallets and BNPL players are set to be responsible for the slow decline of Credit Cards, Debit Cards and Direct Bank Transfers.

Focussing on the Indian context, we see a starker shift towards BNPL and digital wallets even in the two years between 2018 and 2020. While Wallets and BNPL increased from 32% to 40% and 1.6% to 3% respectively, credit cards, debit cards, bank transfers, and most importantly – cash on delivery, all saw a proportional drop in their usage in e-commerce transactions. To provide context, in absolute terms India’s BNPL market is expected to grow to $100 billion by 2025 from about $15 billion levels now.

Further, the anecdotal evidence provided by the initiatives undertaken by large digital marketplaces points to the increasing importance they are giving this business model. Flipkart, Amazon, Paytm, Byju’s and others are betting big on India’s BNPL segment ahead of the festive season. Some of these strategies have been highlighted below:

  • Flipkart facilitates such transactions through its subsidiary Flipkart Advanz, while Amazon has partnered with non-banking financial company Capital Float.
  • Paytm is offering BNPL as part of its post-paid service in a tie-up with Aditya Birla Finance.
  • In the EdTech space, Byju’s and Unacademy have partnered with Lazypay and Capital Float, respectively.
  • Private banks are experimenting in this segment. ICICI Bank offers pay-later services on its app, while Axis Bank-owned Freecharge has also entered the space.

 Key Risks

As mentioned in the introduction, something that sounds almost too good to be true – could also pose a certain amount of risk if not dealt with appropriately. For starters, many companies use BNPL as payment product where credit reporting does not happen. This could potentially result in the situation where a customer’s actual pay burden is not calculated when they are applying for other loans, causing them to be approved despite being overleveraged.

Just as importantly, the regulation surrounding BNPL serves as a risk both to the fintech companies as well as the investors. With the growing attraction of the segment, there is increasing probability that it will attract the attention of the RBI. The ambiguity around providing a credit facility marketed as a payment service could potentially dilute the borrower’s responsibility to pay back the loan. 


Despite the risks mentioned above, TVS Capital continues to take keen interest in this newest disruptor in the payments ecosystem. We see BNPL services becoming ubiquitous like credit cards and digital wallets through increased adoption compared to traditional methods of payment

Moreover, with its large market opportunity, lower delinquency rates when compared to credit cards, and strong Indian payments infrastructure, we see the potential for these service providers to play a key role in a digitised India.

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