How BNPL can be a disaster for GenZ and what RBI is doing for it

Industry insiders claim that many “buy now, pay later” (BNPL) businesses deceived clients by failing to disclose loans taken in their names explicitly. As a result, the Reserve Bank of India became involved, and it has since outlawed the practice of loading credit lines onto PPI, a common way for these businesses to extend credit.
Many BNPL companies, including Jupiter Edge and Early Salary, have suspended operations as a result of this action while they develop new business plans and implement reforms. Even more recently, BNPL Card Slice has begun providing loan agreements and sanction letters to customers with each transaction.

What Is the BNPL?

To start, the concept of paying later while purchasing now is not entirely new. You might be astonished to learn that it all started in the late 19th century when companies all throughout Europe began lending to industrialists. These loans were secured by property. The opportunity to buy goods and pay for them later was available to industrialists. Of course, there was an interest rate in this model.

Fintech companies made "Buy Now Pay Later" a digital option in the early twenty-first century.

There is now a no-interest term under the current BNPL operating model. With the Buy Now Pay Later program, consumers like you can buy anything without having to pay for it right away.
Even if you must repay, it becomes simpler for individuals without funds. Instead, you get to split the cost of the items into simple instalments or a loan with no interest.
Unlike conventional loans, which last for years, the payments can be made within 90 days. You no longer incur interest if you make the payment within the predetermined time range. However, if you go over it, there will be a fine added to the overdue amount.
This is how the BNPL utility functions on a basic level.
The BNPL has left its imprint. 60% of internet buyers have made use of BNPL services. Jupiter, Ola Pay, Postpe, ZestMoney, LazyPay, and Simpl are significant participants in India.
Most of their users are between the ages of 18 and 25, according to data. 20 percent of BNPL users were members of the millennial generation. According to a survey issued by ZestMoney in 2021, the epidemic alone saw a 2x growth in millennial users and a 3x increase in GenZ customers.
The RBI is not opposed to 90-second credit. Even so, the regulator was prepared to permit nonbank finance companies, or NBFCs, to maintain their current advantage over banks in the origination of short-term consumer credit, particularly for incredibly low-ticket purchases. Since NBFCs now have to meet fairly strict capital requirements and provide thorough disclosures of the risks on their books, shadow banking in India isn’t the mysterious entity it once was. Fintech players can nevertheless entice them into what an RBI working group referred to as the “Rent-an-NBFC model” of digital lending, despite the fact that they are naturally risk-averse due to the opportunism encoded in their DNA.
When that happens, the process no longer just involves pairing up customers and lenders. As an alternative, the intermediary fintech company begins to provide a first-loss default guarantee for a set proportion of the loans guaranteed by a nonbank lender. Due to their lack of regulatory capital requirements, digital intermediaries now have credit risk on their balance sheets.
Given how challenging it is for the RBI to dismantle each such private agreement between fintech and NBFCs, the latter have been targeted by the central bank in an effort to control purchase now, pay later. Every small-ticket loan should be treated as a marriage that has been blessed by the banking church, according to the RBI.
The rise of buy now, pay later has troubled nations other than just India. The UK government is also tightening regulations on BNPL loans to make sure that lenders do adequate affordability checks and do not lure in the wrong applicants with deceptive, exaggerated advertising. Households are tempted to take interest-free loans as a result of the erosion of their purchasing power brought on by inflation. However, the chance of falling prey to an endless cycle of overspending is also there. There is intense competition between BNPL experts and banks even in the UK. Alex Marsh, the CEO of Klarna’s UK operations, claimed that a Barclays Plc report calling for stricter regulation of the industry was an attempt by the London-based bank to promote its own “high-cost” loan instalment option.
Although durables bought on instalment plans come with longer payback schedules and higher credit ceilings, the normal credit length for zero-interest loans in India is between 20 and 40 days. Despite still being in its infancy, BNPL is growing quickly because of the growing acceptance of both e-commerce and digital payments. In January, Mumbai-based HDFC Securities forecasted that the market for “pay later” goods will reach $56 billion by March 2026, growing 74% annually. The road to profitability, however, is where the issue resides. The brokerage stated in its analysis that “the BNPL model has a considerably high dependence on late fees, which also replicates itself in rising credit charges.”
Players in the fintech sector and shadow banks will definitely campaign against delivering a whole sector to banks on a silver platter. The only publicly traded credit-card company in India, SBI Cards & Payment Services Ltd., saw a nearly 7% increase in shares on June 21, a day following the RBI’s new guidelines. Affirm Holdings, Afterpay Ltd., and Klarna are just a few of the startups that BNPL is causing to be disrupted by big tech companies like Apple Inc. and powerful banks like JPMorgan Chase & Co. India cannot be protected from the adoption of pay-later innovations.
The distribution of the spoils among banks, nonbank lenders, and fintech may be the subject of a compromise. But one thing is certain: BNPL still needs to demonstrate that its product is both economically sound and socially useful. The RBI is correct to want to rein in the industry’s wings before it’s too late if regulatory arbitrage, such as the exemption from having to report all delinquencies to the credit bureaus, is how it will recruit capital.
History would suggest that BNPL has previously been a problem as well.
The American stock market crisis between 2002 and 2008 is a sad illustration of the BNPL plan. During these years, a lot of people received zero percent interest home loans. Because of the questionable policy-writing and interest regulations, borrowers went into default and were left with loans for their retirement but no homes.
If it is quickly implemented, the RBI’s decision to close ranks against loose financiers is a step in the right direction.
The Reserve Bank of India (RBI) recently took a stance against Buy Now Pay Later (BNPL) firms. But why did the RBI decide to target these companies? It appears that their retaliation was in response to BNPLs not following rules and regulations set out by the central bank. The RBI wanted to ensure that businesses abide by the rules and guidelines it sets forth, so it chose to go after those who weren’t in compliance. With its actions, the RBI is sending a message that companies must take responsibility for adhering to its standards.