Industry insiders say many ‘buy now, pay later’ (BNPL) companies misled customers by not explicitly disclosing the loans taken in the customer name , eventually attracting attention from the Reserve Bank of India, which has now prohibited loading of credit lines on PPI, a popular method used by such companies to offer credit. 

This move has led many BNPL companies such as Jupiter Edge and EarlySalary to halt operations as they figure out alternative business models and bring changes. BNPL card slice has even started showing customers loan agreements and sanction letters with every transaction.

This is a welcome change for customers, who have taken to social media, expressing surprise that multiple postpaid and pay later products take a loan against their name without explicitly disclosing it. 

“A few weeks ago, dad gets call from Aditya Birla Finance, asking him to pay his due amount. He was surprised since he didn’t have any loan,” wrote Vivek Raju on Twitter. On exploring his dad’s credit reports, Raju found that a ₹31,500 loan from Aditya Birla in his name in the credit report, along with two other loans, ₹28,000 from Karur Vysya Bank and another of ₹7,000 from Capital Float. Apparently, Raju’s dad has signed up for multiple postpaid products, which raised these loans in his name to extend a postpaid balance. 

Ankur Bansal, Co-founder & Director of venture debt firm BlackSoil, told BusinessLine that there have been instances of BNPL companies not marketing their products as a loan. In some cases, the names of lenders and other terms and conditions are also not disclosed upfront. 

“The targeted users of BNPL companies are typically new to credit (students and young professionals) and are particularly vulnerable. These users could also be unaware of how defaulting on these repayments attracts fees, impacts their credit history, and any other such consequences,” he added. According to TransUnion CIBIL data, 60-days past due delinquency levels in the BNPL segment were as high as 18 per cent, which is twice that of non-BNPL products. 

Adding to this, a fintech entrepreneur, who spoke to BusinessLine on condition of anonymity, said: “Some BNPL companies were also pushing boundaries by offering pay later products on min-KYC, whereas such products should only be offered on full-KYC accounts. This creates systematic issues.” Another industry source also agreed that some companies did not treat pay later products like a loan, they treated it like a merchant discount or advance, which could have raised eyebrows of the authority. 

Evolution of financial products comes with a gestation period during which data on market behavior and product performance is collected and monitored, and accordingly, the regulators take a decision on setting up an adequate governance framework.

“BNPL has grown exponentially over the last few years. As per RBI data, BNPL constituted the highest share of the banking sector’s digitally disbursed loan volume with 37 per cent. We believe the regulators now have enough insights on the BNPL segment to take a decision on implementing a governance framework,” said Amit Ratanpal, Founder & MD, BLinC Invest, while commenting on why the RBI has come up with the new guidelines. 

BNPL use cases

Along with risks, customers have also benefited from BNPL cards in various use cases such as paying for a child’s education, and emergency medical expenses, among others. Ishan, a 28-year-old start-up founder, who is also a customer of one of the BNPL cards told BusinessLine that pay later cards have helped him to pay for emergency medical expenses after he resigned from the job. “With pay later cards I could split my expenses across three months for zero interest and did not have to pay the whole amount the next month as it happens with credit cards,” he added.

According to consulting firm RedSeer, India’s BNPL market is estimated to reach $45-50 billion by 2026, with the number of people accessing formal credit via BNPL increasing to 80-100 million in this period.   

Search for alternative models

Following the RBI’s new guideline, multiple BNPL companies have either paused or modified their credit offerings. Ola Money, which earlier allowed the customer to use their postpaid balance on Ola Money card/wallet, has disabled the provision after the RBI’s new guideline. Jupiter Edge also informed users recently that it is pausing services because of the recent guidelines received from the RBI. 

An alternative model for those impacted by the PPI regulation could be to move to a more conservative BNPL model. “This would entail building up a merchant network and directly transferring the loan amount to merchants for the purchase made by the borrower. However, this restricts scalability compared to a card model which forgoes tie-ups with merchants and allows the user to use their credit limit wherever VISA/ Mastercard is accepted,” said Bansal. 

He added that since most fintechs have their own NBFC arm, another alternative would be for their NBFCs to apply for a credit card licence. The RBI allows NBFCs with a minimum networth of ₹100 crore to do so with its approval. However, getting a licence might have its own challenges. 

The companies with good credit score customers are also exploring co-branded credit cards as a business model and depart from being a pay later card. In the co-branded credit card model they will have to tie up with banks to offer credit cards. 

While the RBI permits co-branding of credit cards, it restricts the role of the co-branding partner (the fintech company in this case) to the marketing and distribution of cards. It also does not allow the fintech partner to have access to transaction information undertaken through the card. Bansal noted that this would mean that underwriting activities would also have to be undertaken by the bank which is typically the core competency of the fintech companies.

BNPL players have made recommendations to RBI for certain versions of the BNPL model to be allowed. “There is a possibility that RBI might revise the notification that will allow relief to some of the BNPL business models. While it is small possibility, we believe in this possibility,” added the fintech entrepreneur quoted above.