In recent years, buy now, pay later (BNPL), a short-term financing method, has gained traction among consumers and it has gained more attraction since the outbreak of the pandemic last year. Many e-commerce, banks and other retailers have started to offer this scheme to their customers, particularly to improve their sales in the upcoming festive season. Some of the companies offering the BNPL scheme include Amazon, Flipkart and other mobile applications including ZestMoney, Ola Postpaid and so on.
But before you as a consumer decide to opt for a BNPL, it is better to understand what it means and how it works.
What is it?
Buy now, pay later is essentially a short-term financing service provided by retailers (online and offline), and a few banks such as HDFC Bank, where you (consumer) can spread out your payment for the purchase made. You can make the payments (for the product purchased) over a period of one to 12 months or more, depending on the service provider.
According to many industry experts, BNPL helps in bridging the financial lending gap in the system. Through this scheme, many can afford to buy today and pay later in small amounts over the course of time. It offers instant credit, and the entire process is made digital with many service providers offering auto-debit on a specific date. However, it may not be applicable for all products available with the retailers or e-commerce service providers. Similarly, the limit (amount) eligible for BNPL too could vary with the service providers.
How does it work?
The core principle of BNPL is, you buy a product today and pay over a certain period. While the BNPL scheme may slightly vary with service providers, the onboarding process is similar across the retailers.
Let’s take the case of Amazon’s buy now pay later scheme to understand how BNPL works.
Amazon’s BNPL has made the entire process digital.
- You as a buyer should complete the one-time setup process where your KYC is verified. A PAN card is mandatory for completing the verification.
- Once you are onboarded, you can choose your EMIs ranging between 3 and 12 months. Amazon offers this service in partnership with Capital Float and IDFC First Bank.
- At the time of check-out, you can choose tenure options (repayment options) based on the purchase values. For instance, for opting for a BNPL over a three-month period, the minimum product value should be Rs 3,000 and the maximum should be Rs 30,000. Similarly, for a six-month tenure, the minimum amount should be Rs 6,000 and maximum Rs 60,000.
- While there is no transaction fee or usage fee or onboarding fee charged by Amazon, other service providers may charge.
How does the repayment tenure look for different companies?
The tenure (repayment period) also varies with service providers. For instance, Flipkart offers a repayment tenure ranging from 3 to 48 months. Similarly, LazyPay, a payment service platform where you can shop from various merchants including Swiggy and Book my Show, has tenure from 1 to 12 months. Additionally, it claims to offer an interest-free credit period of up to 15 days, before which you can pay the entire purchase amount. In the case of BNPL offered by HDFC Bank under FlexiPay, the tenure is 15 to 90 days.
Some retail service providers also offer partial conversion of your purchase amount to EMIs. That is if you had purchased for Rs 25,000 and you can pay Rs 10,000 and convert the balance of Rs 15,000 to EMIs.
But keep in mind that if you miss the payment on the date stipulated (5th of every month in the case of Amazon and Flipkart), you will be charged late payment fees. In some cases, additional charges could also be levied. For instance, if the bill amount is Rs 5,000 or more, the late payment fee is Rs 600 (including GST) in Flipkart.
Buy Now Pay Later – Pros and cons
The BNPL scheme has its benefits. For one, it is a simple and easy way of procuring credit instantly. Almost all the retail service providers have made the process digital. While it appears to be a better option than a credit card, in terms of offering EMIs spread across a certain period, credit cards too have started to provide ‘convert to EMI’ option to their customers. But the interest rate in the case of BNPL could be lower than that of the credit card.
Also, in most cases, there are no transaction or processing fees, annual maintenance or renewal fees, unlike credit cards.
However, BNPL has downsides too.
One, your overall shopping usage on the platforms will be restricted to an aggregate of Rs. 60,000 in a year. This is because the amount of loan sanctioned using the OTP-based KYC cannot exceed Rs 60,000 amount in a year (without completing the full KYC) as per the RBI mandate.
Two, generally, the purchase of products including jewellery, gift cards, payment of credit card bills, bullion, and so on are not allowed under the BNPL scheme.
And lastly, if payment is not made on the due date you may end up paying late payment interest and other charges.
While BNPL enables you to improve your lifestyle, keep in mind your repayment and income capacity.