TOPIC : Buy Now Pay Later | 23-11-2021

© 2018 Risk Educators Pvt Ltd. Confidential, for limited circulation only. 1
Index
• Evolution of Credit
• Credit cards vs BNPL
• Introduction
• Trends driving BNPL businesses
• BNPL models
• Business model canvas
• Economics of the model
• Regulations
• Key risks

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Evolution of Consumer Credit

Capital
Bajaj Float
Finance (2013)
Klarna (2008)
(2005)
Credit
cards
(1958)
Bahi-
Khata
(Prior
15th CE)

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Credit cards Vs BNPL

Credit cards BNPL

Long application approvals. Easier and instant approvals.

Require a good credit history to avail a Need not have a credit history. Only
credit card. Thorough credit check is soft check is conducted.
conducted.
Charge interest from 21-42% p.a Charge interest from 0-24% p.a

Hidden charges are levied. Follows a low cost and transparent

model.

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Introduction to BNPL
Buy Now, Pay Later (BNPL) is a type of short-term financing that allows
consumers to make purchases and pay for them at a future date, often interest-
free. Also referred to as point-of-sale installment loans, BNPL arrangements
are becoming an increasingly popular payment option, especially when
shopping online.
- Investopedia

Key players in BNPL business are Affirm, Zest Money, Lazy Pay, Amazon Pay,
Paytm Postpaid, Flex money, Ola pay, After pay, Razor, Post-pay.

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Trends driving BNPL

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Models in BNPL

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Models in BNPL contd.

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 Business model
Key Activity Customer
Relationships Customer
• POS lending Value • Loyalty and segment
Key Partners • Product Propositions reward
Development program • Early phases
• Payment • Global • Flexibility • Flexible : Millennials
Lenders Opportunities • Conversion payment and Gen Z
• Merchants (E rate • Evolved
-com / Key Resources Channel
• Average phase: Gen
POS platform order value X
s) • Brand value • Merchant
• Retention • Merchants
• Merchant checkout
Relationships • Card linked
installments
Cost Structure
Revenue Stream
• Technology development and customer
• Merchant Fees
acquisition
• Late Payment Fees
• Regulatory and Compliance Fees

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 Economics of BNPL business
GMV * [ Net Take Rate – Debt financing cost – Debt
BNPL
management cost – Provision for Debt impairment ] - Marketing
Profits =
& Sales expenses – General & admin expenses
Net Take Rate : Commission charged to merchants (take rate) CONSUMER-MERCHANT
- processing fees paid by BNPL Co. FLYWHEEL
Debt financing cost : interest BNPL providers pay banks for
liquidity
Debt management cost : credit check cost + payment
collection cost – late payments collected from customers
Provision for debt impairment : weighted average % of
loans that are not paid back

GMV (Gross Merchandising Value) : sum of all the payments

conducted on the BNPL platform.

Marketing and sales : expenses incurred on acquiring and

onboarding both merchants and customers

General and administrative expenses : team salaries ,

technology and infrastructure costs.
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 Regulations
European Union moves to protect customers
EU consumer credit rules
• Information related to credit must be presented clearly so that customers understand what they are
signing up for
• Called out detrimental products , because of high costs they entail or high late payments fees.
• There are calls for unsolicited sale of credit or the unilateral increase of a consumers’ overdraft or
credit card limit to be prohibited
• Credit providers should make thorough assessment of consumer’s creditworthiness based on the
consumer’s income and expenses as well as other financial and economic circumstances.
These rules may discourage sign ups more onerous credit checks may make it harder for consumers to
sign up for new services.

Australia
BNPL providers enjoyed a relaxed regime in Australia, as the provisions of the Australian National
Consumer Credit Protection Act of 2009 do not apply to certain types of loans, including short-term interest-
free credits. The industry has eventually adopted a self-regulatory approach.
The Australian Finance Industry Association (AFIA) announced on the 1st of March 2021 that its
Code of Practice for the BNPL sector has come into effect.
BNPL providers that are compliant with this Code must carry out assessments before a customer can
make a purchase and conduct additional checks to prevent consumers from stretching their arm further
than their sleeve will reach.
BNPL disputes under the code will be managed by the Australian Financial Complaints Authority, where a
designated committee will have the power to publicly denounce companies that provide loans services
outside the Code’s standards.

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 Regulations contd.
Regulatory issues for BNPL in UK
Consumer credit regime : Falling within this regime means 1. Mandatory regulatory authorisation from
FCA or PRA 2. Compliance to consumer credit rules 3. Requirement of Consumer credit Act 1974 –
mandatory disclosures of credit agreements with prescribed wording
Regulated lending (Merchant model) b. Regulated broking (Partner model )

Exclusions : 60F
1. The credit agreement is for a fixed sum of credit and which is made by the lender under pre-existing
arrangements with the merchant;
2. The number of payments to be made by the borrower is not more than 12 and those payments are
required to be made within a period of 12 months or less (beginning on the date of the agreement);
and
3. The credit is provided without interest or other charges.

Money laundering regime : the scope wide – it applies to any ‘lending’.

The consequences of falling within this regime are that the person must (1) apply customer due diligence
measures (for example, verifying the identity of the customer) and (2) be registered with the FCA Financial
Conduct Authority (for the purposes of money laundering supervision).

For the Merchant Model, it is likely that the merchant would fall within scope. For the Partner Model, it is
likely that the BNPL provider would fall within scope but the merchant may not depending upon how the
arrangements are setup (because the broking of credit does not fall within the scope of the anti-money
laundering regime).

With these conclusions in mind, the Government intends to make legislative changes as soon as
parliamentary time allows. © 2018 Risk Educators Pvt Ltd. Confidential, for limited circulation only. 12
 Regulations contd.
US

• According to a study by Credit Karma, 40% of US consumers who used BNPL have missed more than
one payment, and 72% of those saw their credit score decline.
• Fitting BNPL into the US regulations is relatively challenging since laws vary by state.
• regulated by federal and state laws under consumer credit regimes, depending on the different
definitions of credit covered by those laws.
• The loan regulations in the country can’t be fully applied to BNPL providers, because they don’t make
loans per se to consumers, but they facilitate and support the instalment plans, on behalf of the
customer.

CASES:
At the beginning of the year, some tensions occurred in California. The California Department for
Business Oversight (DBO), a division of the state government that regulates financial services, has taken
over several cases focused on BNPL services.
• BOD refused to grant Sezzle a Financing Law license to carry out its operations.
• As well, in March 2021, DBO accused Afterpay of collecting taxes from more than 640,000 Californians
in transactions that were in fact ‘illegal loans’.
• As a result of the settlement, Afterpay, which had 5.6 million active users in the US as of June 30,
2020, was forced to return USD 900,000 to consumers and pay USD 90,000 in administrative fees.

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 Regulations contd.
India
1) The Reserve Bank of India Act, 1934 - broadly defines NBFCs to include a company which
carries on as its business or part of its business financing, whether by way of making loans or
advances or otherwise, of any activity other than its own. It would therefore appear that the
activity of extending short-term loans would require Fintech's offering BNPL services to be
registered as NBFCs.
To alleviate the need for such a registration, BNPL service providers typically partner with
NBFCs.
If, a Fintech is underwriting any bad-debt risk or financing the debt owed by the consumer
through any mechanism, then it may qualify as having undertaken NBFC activities. This may in
turn, trigger the need for appropriate registration with the RBI.
2) The Payments Act governs payments systems which enable payment between a payer
and a beneficiary, including systems enabling credit card and similar operations.
Requires approval since a BNPL feature relies heavily on a financial partner registered as an
NBFC for payments and settlements, Fintech entities offering BNPL do not obtain
authorization.
3) The need for any additional government intervention, as proposed in the RBI discussion
paper, will also have to be thought through, as such intervention may hinder growth and stifle
innovation. For example, digital wallet companies have in the past made representations to
the RBI to lessen regulatory interference fearing that increased regulatory requirements will
affect product use. Innovation, and consequently, the Fintech space, can only thrive in an
evolved regulatory environment.
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 Risks in BNPL
• Dishonest merchants can be a channel of fraud.
• Merchant • Failure to identify legitimate from illegitimate merchants.
fraud risk • Illegitimate merchants can submit falsified orders using
real or fictitious consumer PII and collect payments for
products sold but not shipped.

• Due to pandemic some merchants are at a greater risk of

• Merchant failure. Some might be coping with declining revenues,
Default rising variable costs and high fixed costs, or any other
risk scenarios in business where they are unable to pay the fees
which contribute to increasing merchant default risk.
• Merchant shutting off their business without notice is
problematic if they owe fund to its BNPL partners.
Buy Now, Pay Later FinTechs leverage 3rd Party Solutions to Mitigate Risks

• BNPL players are trying to mitigate merchant fraud and merchant default risk by combining data, such as
risk detail, business cash flow analysis, previous payment performance etc.
• Additionally, BNPL FinTechs are seeking assistance from 3rd-parties with expertise in data analytics, risk
score/index modelling and decision automation.
• These powerful risk management strategy enables quick approve/decline decision making.
• Ongoing merchant monitoring will enable timely responses to changing risk conditions.
© 2018 Risk Educators Pvt Ltd. Confidential, for limited circulation only. 15
Risks in BNPL contd.
• Soft credit checks
• Opaque debt performance reporting – lenders could
• Customer underestimate a borrower's debt level.
Default • With job losses and unemployment, consumers who
risk may want to but who do not have enough income to
make repayments- may fall into debt trap.
• 15% Australian consumers using BNPL had to take
out additional loan to pay off their obligations.

Mitigating step: Economies of scale along with data analysis will help in eliminating
bad customers which ultimately will reduce customer default risk
1. Chargeback is always an issue with compromised accounts
and the liability falls on the BNPL.
2. Fraudsters are known to use synthetic identities to pass
through fraud, KYC and credit checks with zero intention of
• Cyber and paying back the purchase. Account takeover
attacks (ATO) can also take place on such platforms, with
Fraud
fraudsters using bots to exploit weak passwords, or
Risk purchasing stolen credentials from paste bins on the dark
web.

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Risks in BNPL contd.
• Default
• Chargeback liability might fall on BNPL service
fraudulent
providers when consumers notice an unauthorized
charge
purchase or makes the purchase and attempts to claim
back
it as fraudulent.

• The BNPL sector is growing drastically. In addition to

pure BNPL startups, e-commerce platforms, banks as
well as fintech/payment companies have entered this
• Market
space.
Risk
• Flywheel effect – will lead to consolidation in the market
(small players unable to achieve economies of scale or
raise enough money will have to exit the space)

• Interest • BNPL players may not always be able to obtain

Rate Risk loans from payment facilitator at desired interest
rate.

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References

https://inc42.com/startups/how-simpls-bnpl-model-paved-the-way-for-indias-new-age-
digital-pay-later-market/
https://yourstory.com/2021/07/buy-now-pay-later-changing-credit-loan-landscape-
india/amp
https://www.mckinsey.com/industries/financial-services/our-insights/buy-now-pay-later-
five-business-models-to-compete
https://insight.equifax.com/top-risks-facing-buy-now-pay-later-fintechs-today-part-1-of-
3/
https://seon.io/resources/buy-now-pay-later-fraud-risks-and-prevention/
https://www.linkedin.com/pulse/buy-now-pay-later-overview-predictions-imad-el-fay
https://www.ibanet.org/article/34FFE3BA-3990-4169-8194-3CFDCCB17006
https://www.rfigroup.com/rfi-group/news/buy-now-pay-later-sector-risk-following-
europe%E2%80%99s-moves-protect-consumers
https://www.lexology.com/library/detail.aspx?g=3986de58-3475-4e10-ab6a-
8fabf9b8f174

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