How Has BNPL Tipped the Access to Credit Scale?

Getting access to money has always been a challenge to large sections of society, people who have nothing to show for their trust factor, would not be given loans. The evolution of the banking sector and various programs by governments have increased the rate at which people open up savings bank accounts, which allows them to avail benefits the bank offers, such as ATM facilities, various deposit schemes and many more, but even now only a few eligible individuals qualify for loan services. This changed when the buy now pay later model came into the picture, this model allows people to take loans in small amounts during emergencies which banks fail to offer.

Ease of Access to Capital

It is a universal statement that an average individual would hesitate to spend a huge portion of his money in one go, even if it may or may not end all his savings. The concept of paying things by EMI with low interest is very useful for people who live on a calculated budget every month, but depending on the cost of the commodity, by the time the payments are done, there is a high chance the buyer might have paid 1.9X the price of the commodity when interest comes into the picture. With the security and collaterals bank demand for a loan, there are a lot of barriers for individuals and small businesses to get a loan, Lot of non-banking financial corporations (NBFCs) of late have started to issue small capital to loan seekers, and this can be split up to repay overtime with interest specified by said corporation. This is highly attractive to youngsters who do not have the credit score the banks demand from them and to people who shop online a lot, thanks to this system being relatively new compared to the currently existing rigid banking system, it didn’t take long for it to present itself as a lucrative option.

BNPL vs. Credit card, what is better?

BNPL transactions are carried out on the NBFC providers’ cards and their proprietary app. Since they do not work like a credit card, merchants do not offer discounts on those cards, there are a lot of issues with them, it is easy to decline the credit card purchase, but BNPL transactions take time as the merchant has to go through different channels to report the decline, even after returning the commodity you paid for, the transactions will still be getting carried out, a refund may be a hassle. It is estimated the BNPL market is about USD 6.1B in 2022 and has a CAGR of 26.1%, which is really high. As more and more non-government authorities are handling money lending, the flow of money in the economy has increased, this is resulting in higher GDP and indicating the quality of people’s lives are getting better. The spectrum of capital is too little for getting a loan from a bank or too high to borrow from friends or family, the BNPL services hit that sweet spot.

The Cracks in the System

But, like all changes, this system had been subjected to negativity too, since it is a relatively new space, there are little to no regulations in place, and the ease of gaining access to money is very tempting to youngsters in college who aren’t on a fixed salary, human nature strikes here, the temptation has increased consumption of individuals who are in no position to repay the credit offered, this has caused a lot of concerns among a lot of parties. Youths are making a lot of BNPL transactions and are failing to pay the principal amounts amassing a lot of interest, and the longer you fall behind on your payments, the more interest you accrue. A lot of policymakers are increasingly getting aware of how easily vulnerable people are made to take loans without their knowledge.

The Fine line to be Drawn

There is no such thing as a foolproof system, whenever something good comes, the bad is soon to follow, the only thing policymakers can do is implement policies which will reduce the number of victims, human nature is one thing a lot of systems must consider while they implement certain businesses. There is a fine line between convenience and abuse of the system, it takes responsibility from both sides, the consumer and the service provider, We do not want to elicit a Darwinian response to an industry which has given us convenience, the sooner we figure out the middle ground, the better.