While BNPL products may be good for businesses, is there a dark side to it for customers, especially in less developed countries? Why are the governments in India and the UK tightening rules on BNPL loans?

One of the new trends to emerge from the e-commerce boom during the pandemic is the Buy Now, Pay Later (BNPL) phenomenon. There have been many reports to show that the BNPL products have become attractive for both B2C and B2B markets.

For example, it was highlighted at Mastercard’s Buy Now, Pay Later APAC Summit in early December 2021 that the demand for Commercial BNPL products is especially high in Singapore. They found in a survey that  80% of respondents expressed interest in installment payments for small businesses in a Mastercard survey result. In India, 77% of the respondents expressed interest in commercial BNPL.

While the BNPL products may be good for businesses, is there a dark side to it for customers, especially in less developed countries?

The Dark Side of BNPL

Let’s stop by the Indonesian market for a while.

Credit card penetration in the country is quite low: 6 percent in 2021. Data shows that 65 percent of Indonesia’s 275 million population remain unbanked.

Enter BNPL schemes for mobile-savvy customers in the archipelago, with mobile internet penetration at 68 percent in 2021.

According to a report published on Aljazeera’s website (In Indonesia, ‘pay later’ services leave some drowning in debt), BNPL “lets customers pay for goods in instalments at varying rates of interest,” and it “has helped to plug a significant lending gap in Indonesia”.

“As the country’s population has moved increasingly online in recent years, digital payment methods like BNPL have experienced a surge in usage,” said the report.

The report suggests that this phenomenon has led many low-income consumers in Indonesia to make purchases with BNPL that they can’t afford to pay for. Without giving any hard statistics, the report hinted at a growing situation in which such individuals are falling into a debt trap.

Reserve Bank of India puts a stop to BNPL

Now, let’s hitch our wagon to India.

India is a huge market for BNPL products. According to LazyPay, there are 60 million eligible users of BNPL in the country.

Bloomberg columnist Andy Mukherjee also wrote in his column about how India’s regulatory bank, Reserve Bank of India, has put a stop to BNPL in India. Last week, India’s central bank issued a directive forbidding non-bank wallets and prepaid cards from extending credit lines with immediate effect, responding to complaints raised by commercial lenders.

According to TechinAsia, India has a user base of 917 million debit cards but only 73.6 million credit cards.  Seeing this vast gap as an opportunity, several fintech players such as Slice, LazyPay, Jupiter, AmazonPay, OlaMoney, and Uni have been using the prepaid payment instrument (PPI) license to offer credit lines to customers via neocards or wallets.

Mukherjee says that India is not the only country alarmed by the proliferation of BNPL. The UK government is also tightening rules on BNPL loans. They want lenders to ensure that they carry out proper affordability checks and don’t entrap unsuitable borrowers with unfair, over-the-top advertising.

“As inflation cuts into the purchasing power of households, the temptation for them to use interest-free loans is high. But so is the risk of getting sucked into a vicious cycle of overspending,” wrote Mukherjee.