The Buy Now Pay Later applications have been prevalent in India for quite some time now.
These apps work on the principle of allowing people to buy commodities on credit. However, the reality seems to be a little quirky.
This detailed guide will give a clear-cut idea about the current status of the BNPL apps and how to use and not use these credit line services.
What Are BNPL Apps?
The BNPL apps or the Buy Now Pay Lat er apps can be used to buy any product without actually spending your own money.
It is more like using a credit card service. The credit amount is either paid in installments or paid in full before the due date by the user.
If your income is lower than a specific limit, say Rs.20,000, or you’re a student, it is impossible to get a credit card. However, a BNPL app can make this possible by using credit. Even banks offering credit cards will charge interest for using such a service.
But BNPL apps give interest-free credit to the users subject to a certain time limit, after which you have to pay the interest and other corresponding charges.
So, for instance, if you can’t afford your favorite dress or shoe, you can easily buy it using these BNPL applications now.
You can simply download the preferred BNPL app from the app store and sign in effortlessly. There is no sign-up charge or subscription fee involved in these apps.
Further, these BNPL apps are functioning in India and foreign countries like America and Australia. You can even use multiple BNPL apps at a time.
However, pending money using multiple Buy Now Pay Later applications can be dangerous as it highly damages your credit score.
How Do BNPL Apps Work?
The BNPL applications work on the commission model, where they make profits by getting a commission from the seller. This only applies if you buy a product through the BNPL application.
For example, when you purchase a product worth Rs. 4000, the money paid to the seller by the BNPL app holder might be 3850 Rupees. The remaining 150 Rupees are taken as a commission by the BNPL operator.
This way, the market value of the seller increases as people prefer buying products using credit, though it is beyond their affordability. Earlier, people used to buy only those products which they could afford.
However, now the same product is purchased by many as they can repay the money in installments with the help of any BNPL application.
Also, the BNPL apps make money by collecting interest on late payments. When the repayment of the amount is delayed, a penalty is charged, and it increases with subsequent delays.
The repayment is usually made through bank transfers, credit cards, debit cards, or UPIs.
The Problems And Risks of Using BNPL Apps
The biggest problem in using these BNPL apps is excessive debt. People tend to spend on impulse and because of the easy credit, they spend much more than their budget.
Thus, If you are not using the service wisely, you will pay additional interest charges and debt. Apart from this, no BNPL application is directly registered under the PPI norms.
Many people in foreign countries have found it difficult to repay their credit to the BNPL application, and they eventually take additional loans from banks to repay it.
The issue here is that these Buy Now Pay Later start-ups are not appropriately authorized and do not follow credit rules, including checking credit score and credit history, like the registered lenders.
The interest rate for the delayed payment is even way-higher than the usual loan interest charges.
This adds up at a faster pace, and the sum total becomes much higher than the actual money spent by the user.
Moreover, if you are regularly repaying the amount through a credit card and suddenly, you’re unable to repay, your credit score also gets affected adversely.
These services are provided to people who cannot afford a credit card, so they must have a lower income than the eligible limit. Only when a fixed source of income is available and you’re confident of repaying the amount, should you use a BNPL application.
The Regulations of RBI On BNPL Applications
When any credit line services are provided through a non-banking body, getting approval from RBI to function as a Prepaid Instrument is mandatory. The PPI license is not directly owned by these BNPL apps.
Seeing all the risks involved, the RBI has banned the practice of preloading digital wallets with credit points and the functioning of the BNPL application.
The Non-Banking Fintech Companies now cannot allow their consumers to have digital wallets with the aspect of the credit line.
Though using BNPL applications paves the way for India’s digitalization and the overall economy’s improvement, the future seems to be foggy.
This is why the RBI came up with stringent regulations on non-banking PPIs allowing credit wallets to consumers.
Moreover, there is no proper reporting of the credit used between the people and the lender when using a Buy Now Pay Later application.
This will lead to confusion for other registered lenders for providing different types of loans for the same consumer.
RBI has certain norms for proper bankers or registered lenders while collecting money from the borrower.
This discipline might be broken when the consumer doesn’t repay the amount to the BNPL application. They might even face harassment and unethical means of collecting the debt.
The Future Of BNPL Apps In India
After implementing the ban on these non-banking instruments for lending money, the BNPL companies have asked the RBI for clarification. The question is finding out the right way to operate in the BNPL segment for these companies.
Let’s see how RBI answers this.
It is in the hands of RBI and the respective governing authorities to speak about the rules of being a non-banking PPI in India.
As the RBI is not totally against the idea of BNPL applications, the ban has only impacted a particular type. The RBI has to suggest ways to provide credit line service by the Fintech companies in an alternative way.
After creating a new set of rules to overcome the possible risks of the BNPL platforms, they might be allowed to function. This will probably reduce the dangers of improper collection methods.
Also, people will adhere to a certain credit line service limit.
Moreover, by correcting the enormous interest rates, the Buy Now Pay Later application companies will be able to survive further. RBI aims to demolish only unauthorized digital lenders.
With this, the BNPL application start-ups can function without any threats if they have a proper license.
Alternatives of BNPL Apps
There are many other productive alternatives to using the BNPL apps. You can save money you have planned to use for monthly repayment and use it later for a better purpose.
You can even opt for the SNPL (Save Now, Pay Later) apps that let you save your funds for a future goal. Under this, you don’t have any debts and still manage to arrange the funds for your needs.
You should avoid making impulse decisions while buying and prefer to categorize the expenses based on your needs, wants, and desires.
Furthermore, when you urgently need to buy something, you can always choose to get a personal loan. If you are eligible to pay the loan and have a good income source, the loan will be sanctioned effortlessly.
You can even get help from a family member or partner for emergencies who have a credit card. So, instead of falling into the debt trap, go for one of these options.
After the ban’s implementation by the RBI, there has been a question mark about the future of the BNPL applications.
If the NBFCs follow proper norms, there are high chances of their effective functioning. Especially in India, RBI’s decision seems right as it plans to weed out all the unlicensed lenders.
Apart from that, the standards of repayment and interest charges for delayed payment must be checked thoroughly before using the credit-based service.
Thus, you must check whether your BNPL application is authorized or not while using it in the future. Hope you were able to understand the kind of trap these BNPL apps put on us. Do comment down with your experience with such apps.