The deep penetration of smartphones and the cheap internet rescued payments from the domination of cards and cash, seized access to investments from D-street gatekeepers, and freed credit from the ivory towers of institutional banks. . For the first time, access to these services is in the hands of citizens.
Users in Tier 2 and Tier 3 cities and younger demographics are driving their adoption head-on. There is no doubt that digital literacy in India has exploded. But has financial literacy followed suit?
Obviously not. Reports on how popular buy-now-pay-later (BNPL) financing negatively affects credit scores show that there is a disconnect between access to digital financial services and financial literacy.
In recent weeks, many BNPL users have taken to Twitter to complain about lenders taking out loans on their behalf “without their consent”. A common thread running through these complaints is how users were “horrified” to discover they had accounts opened with lenders without any prior interaction.
It’s easy to read such claims in light of growing concerns about unethical digital lending practices, such as coercive collections and the proliferation of bogus apps. But such “cautionary tales” do more harm than good. The problem is not with the BNPL product, but the lack of education around it.
How BNPL works
BNPL and digital lines of credit have successfully assimilated thousands of underserved customers into the fold of formal financial services. These products serve users with low credit history, allow them to meet their needs or even buy ambitious products and services. They are an attractive solution to cash shortages or liquidity problems.
Users may think of these products simply as in-app payment options, and for good reason – they’re marketed as such. BNPL often positions itself as a no-fee financing option with flexible repayment terms, distinct from credit cards and loans. But if they read the print, customers will find that the principles of such financing are not so different from traditional credit.
BNPL, also known as point-of-sale financing, is facilitated on a host e-commerce or retail technology platform by a lender such as a bank or NBFC. Indeed, the platform offers its customers exposure to tailor-made credit products. The lender faces the capital needed to make the purchase.
Such a partnership is usually facilitated by a FinTech player who builds the necessary infrastructure to connect the platform to the lender. It also manages all loan workflows, such as loan underwriting, servicing and disbursement.
Impact on the platform’s credit rating and NPS
The BNPL is a double-edged sword: its judicious use can unlock several benefits, while reckless abuse can hurt customers’ credit scores. However, the claim that simply having a BNPL facility can hurt one’s credit ratings is false. This is because credit scores go down or up with respect to repayment hygiene as well as other factors like total leverage etc. BNPL lines of credit or overdrafts.
In addition, unlike other credit products, BNPL offers great flexibility in the choice of repayment terms and installment amounts, often at no additional cost. In fact, many BNPL providers allow clients to pre-close their loans at will. Despite these benefits, if a customer fails to pay their dues, they are registered with the credit bureaus and take a hit to their credit rating.
BNPL can even create credit scores
However, in the hype about BNPL’s downgrading credit ratings, the fact that it gives new borrowers a chance to build a strong credit history is overlooked. BNPL providers assess their creditworthiness based on alternative data in addition to bureau data, allowing them to access formal financial services for the first time. With timely repayment, careful use of credit, and extending the longevity of their borrowings, clients can build strong traditional credit scores.
It’s also a mixed blessing for platforms. BNPL is proven to drive growth by reducing cart abandonment rates and improving the overall customer experience. However, if ancillary services such as payments and credit offered on the platform seem misleading and harm the customer’s long-term financial interests, their Net Promoter Score (NPS) is bound to drop.
Customer education is the answer
When it comes to money, there is no free lunch. But BNPL comes as close as possible to a heavily reduced meal. It offers more inclusive financing based not on guarantees, but on other meritorious parameters like reliable cash flow. Customers also get a seamless shopping experience and make the decisions when refunding.
But the current narrative paints BNPL as a dodgy financial service, much like bogus loans or scams. This seriously undermines a truly breakthrough step towards financial inclusion, risking making India’s already reluctant credit user base even more reluctant. Thus, the need of the hour is to bridge the gap between financial literacy and digital literacy.
Platforms, fintechs and partner lenders need to step up their consumer education efforts to explain both the benefits and consequences of new credit products like BNPL. Often, providers obscure the terms and conditions of its use in the depths of help and FAQ sections. Instead, they must accept the fact that BNPL is – at the heart of it – a credit product, but tailored to the needs of an increasingly digitized era.
The opinions expressed above are those of the author.
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