Buy Now Pay Later Fintech Startups are Endangering the Lending Act



Buy Now Pay Later services are growing at a rate of 39% per year and are expected to exceed US$260 billion by 2025

The Reserve Bank of India (RBI) is examining the practices and models of prepaid payment instruments (PPI) and Buy Now Pay Later (BNPL) companies days after the central bank reiterated its stance that regulated activities that require a license cannot be practiced by fintech players, without authorization, under the garb of innovation. The RBI also directed non-bank PPI issuers not to load their wallets and cards from credit lines. Fintech players have approached the central bank seeking clarity over its directive, and the RBI is listening to their concerns, said people aware of the matter.

The concerns of Fintech players are being heard by the RBI. However, the RBI is clear that if one regulated entity is allowed to conduct a business with authorization and licensing, another entity cannot be allowed to conduct the same activity without a license, in the name of innovation, the people quoted above said. The intervention by the RBI was necessary as certain new entities outside its regulatory domain were perceived as threats to the system.

BNPL services are growing at a rate of 39% per year and are expected to exceed US$260 billion by 2025. Klarna, the BNPL unicorn which has turned the retail experience upside down, is now the most valuable EU fintech with a US$45,6 billion valuation. The payment trend surged into prominence in recent years, fueled by pandemic spending by people who wanted to avoid taking on credit card debt while the economy was uncertain. But the hype about BNPL’s rise to power is about so much more than pandemic convenience. The retail financing model is completely being restructured. Fintechs, big tech, and merchants are forming alliances and their new, attractive offerings are shaking up credit card companies and international payment schemes, which are being forced to completely rethink their strategies.

This anticipated growth is coming from an increasingly negative perception of consumers towards revolving credit lines, like credit cards. As a result, consumers look for cheaper and more user-friendly, and more convenient alternatives. Especially the younger generation of millennials seems to be attracted by this offer, with 15 percent of them already using BNPL today, i.e. 5 times more than older generations.

Combine this with the continuous growth in e-commerce for which this type of credit is ideally suited and you can get a feeling why such an astronomical valuation could be justified.

The result is an exploding market of Fintechs offering those promising services, like Klarna, but also Affirm, AfterPay, Cashper, Divido, ratepay, scalapay, Cofidis, and LayBuy. Additionally, incumbent players like PayPal and AmEx have also started attacking this market.

Although many praises this new product for its user experience and convenience and its promise to offer zero-interest rate credits to nearly anyone, many specialists are also highly skeptical about this new trend, as it can push people into unneeded debt for products they don’t even need. BNPL usage still negatively impacts the margin of the merchant. Even though BNPL can be considered as a means to attract additional business (revenue), the cost for the merchant is still considerably higher than other payment methods.

The companies typically make money off fees built into financing options, rather than explicit interest charges. Some follow a business model very similar to traditional “buy now, pay later,” marketing their plans through merchants who see it as a way to boost sales. Others buy invoices at a discount from sellers. Some companies, like Xepelin, do both, arguing that coordinating the entire payment flow increases efficiency.