In India, Gen Z shoppers are influencing e-commerce trends thanks to their high use of buy-now-pay-later (BNPL) schemes. BNPL use among Gen Z went up 232 per cent in 2021, according to a report by Zest Money.
Several companies have either changed their business model to cater to this new trend or have come up with alternative arrangements to be able to cater to the demand of BNPL by young consumers. In fact, by 2025, e-commerce is expected to account for 12 per cent of global consumer spending, with 59 per cent of that being transacted via mobile devices, states a global payments report by FIS. So, e-commerce payment preferences are shifting away from cash and credit cards toward digital wallets and BNPL. But what makes BNPL such an attractive option? Here are five reasons behind its popularity.
- Convenience: This is the No.1 reason for the popularity of BNPL and other fast-payment methods that Gen Z and millennial consumers prefer for online shopping. Processing such a payment takes just a few seconds, and the consumer/borrower can repay the amount later. “Gen Z and millennials are changing the future of shopping where convenience and faster delivery hold prominence in choosing their online shopping destinations. An average Gen Z shopper scans four sites before choosing the final shopping destination, and the journey (faster checkouts) is as important as the destination (faster delivery),” says Rachna Prasad, chief of marketing, Vinculum group, an omnichannel retail e-commerce software solutions provider.
- Lack of Alternative Credit: Most banks and traditional financial institutions do not lend to people with no income or credit score. Many Gen Z and millennial consumers are first-time borrowers, so unless their parents give a guarantee to the bank, they will not be given a credit card or a loan. BNPL products use alternate data and artificial intelligence to study a user’s profile and give credit accordingly, which means that first-time borrowers have access to credit. “As Gen Z (shoppers) are mostly first-time credit users, they are mostly not given a credit card by a bank unless an FD or a guarantee is given for it. The problem in India is that we have 300 million digitally-paying users but only around 30 million credit cards. So accessibility of credit is a problem for India. They can use a BNPL product as a credit card and that too without any interest if they pay back the amount within the stipulated time,” says Upasana Taku, Co-founder and COO, MobiKwik.
- Existing Integration: Many offline stores, too, including Kirana merchants, have a QR code payment solution deployed. So users buying offline can also avail BNPL schemes since many fintech apps such as MobiKwik, Paytm, PayU, Zest Money and others enable this. The buyer can go to any large-format store, grocery store, recharge shop, shopping mall or other places and scan the QR code card deployed there and pay for it via a BNPL mechanism, which is integrated with the buyer’s e-wallet such as those of Ola Money Postpaid, Paytm and others. "Hence, BNPL can be used to pay for a wider array of purchases,” adds Taku.
- Easy Refunds: If a consumer pays for a product online on an e-commerce portal and then wishes to cancel the order, the e-commerce company will issue a refund, but not in real-time; it is a few days before the money hits the bank account. When a consumer buys through a BNPL scheme and cancels the order, the refund is instant. The transaction simply gets cancelled, and the obligation ceases to exist. Say you buy a phone cover from an e-commerce site using a BNPL product. But after a few hours, you find a better deal for the same cover on another website and therefore cancel the original order. If you had paid for the order using debit/ net banking channels, the refund would have taken at least a day or two or even more. But in BNPL, the transaction will simply be cancelled in a few seconds.
- Easy EMIs: Many Gen Z and millennial consumers use BNPL for small purchases, which allows them to break down the purchase into small EMIs to be paid over three or more months of interest-free period. This has allowed people to buy goods that were earlier not within their reach.
Risks To Be Aware Of
BNPL schemes are very attractive, but they too have risks attached like any financial product. The two main risks are falling into the trap of overspending and defaulting on the payments.
- Overspending: The fact that many things can be bought on ‘loan’ and paid for through interest-free EMIs can lead to overspending. Soon, you may find yourself with EMIs that you can’t pay.
- Limited interest-free period: Most BNPL schemes offer inter-free periods, but high-interest rates may apply once that is over. Moreover, if you don’t pay the EMIs as scheduled, default interest and late payment charges will apply. All defaults will be reflected in the borrower’s credit score. As many of BNPL users are Gen Z and millennial consumers, they may not be aware of the consequences of defaulting even on these small loans.
So, to make the best use of all the attractive features of BNPL schemes, understand the terms and conditions before you swipe.