ABSTRACT
With just one click, you can now buy anything, even when you don’t have money in your bank account. Buy now, pay later (BNPL) apps have made this possible. People who lack an employment history or a decent credit score but still need financial support for short-term loans often turn to apps like LazyPay, Simpl, MobiKwik, etc.
It’s a three-way cycle involving the financial institutions, which are the major players, the merchants, and the consumers. Consumers can pay merchants in one click while these major financial players take care of their monetary needs.[1] These BNPL apps typically operate on two monthly cycles: loans taken from the 1st to the 15th of the month have a bill due by the 18th, while loans taken from the 16th to the last day of the month must be paid within the first three days of the following month.[2]
These pay-later wallets are often linked with apps like Swiggy, Zomato, Rapido, Zepto, and other merchants that provide basic necessities such as takeaways, transportation, groceries, etc.[3] Although this facility has made people’s lives easier, it comes with a significant cost. People often get trapped in these pay-later cycles and end up being broke.
In India, the Buy Now Pay Later (BNPL) segment is grappling with numerous compliance and regulatory issues. This article delves into the legislative framework that regulates these BNPL apps and further outlines a significant issue of loan defaults in brief.
INTRODUCTION
What is Buy Now Pay Later?
A short-term financing option known as “buy now, pay later” (BNPL) enables customers to purchase goods and services and pay for them over time in installments, usually at no interest.
Recently, BNPL has gained popularity in India as a quick and cost-effective method of making online purchases, particularly for young customers with no credit history.[4]
How does this facility work?
Customers only need to open an account with a BNPL provider and enter basic details like their name, address, and birthdate in order to utilize BNPL. Many times, it doesn’t even ask people for their address or make it compulsory for them to complete their KYC.
After that, the BNPL provider runs a normal credit check on the borrower to make sure they have a reliable source of income and the capacity to repay. Compared to credit card or loan applications, this credit check is less rigorous.[5]
What is the economic structuring of BNPL’s?
Buy Now Pay Later wallets are Prepaid Payment Instruments (PPIs). In simpler terms, they function like digital wallets that fintech companies fill with funds. Customers with BNPL accounts can utilize these funds to make purchases, and pay these lenders later.
The money flow typically initiates from credit providers such as banks and NBFCs, who extend funds to merchant companies. Subsequently, consumers acquire accounts on these merchant websites and avail themselves of the associated benefits. For example, Amazon has partnered with CapFloat Financial Services Private Limited (“Axio”) and IDFC First Bank Limited (“Bank”) as its lending partners. The PPI issuers here are the Bank and Non-Bank, and Amazon has partnered with them to provide the prepaid credit facility for their wallet, i.e., “Amazon Pay Later”. [6]
However, there are various alternative BNPL structures. For instance, PayU, a Non-Banking Financial Company, extends credit to its mobile application, LazyPay.[7] All these lending partners, Banks[8], and Non-Banks[9], have to get themselves approved by the RBI for the purpose of issuing PPI.
ANALYSIS:
What are the present legislations that govern buy now pay later applications and how it is creating confusion?
All the PPIs are governed under Master Directions on Prepaid Payment Instruments (PPIs) (Updated as of February 10, 2023),[10] Exercising the powers conferred under Section 18 read with Section 10(2) of the Payment and Settlement Systems Act, 2007 (Act 51 of 2007), the Reserve Bank of India (RBI), being satisfied that it was necessary and expedient in the public interest to do so, issued these Directions.
A major notification came up on June 20, 2022[11], which said that as per paragraph 7.5 of 2021 Master directions, which is as follows-
7.5 PPIs shall be permitted to be loaded / reloaded by cash, debit to a bank account, credit and debit cards, PPIs (as permitted from time to time) and other payment instruments issued by regulated entities in India and shall be in INR only.[12]
Master directions on PPI don’t allow for these PPI instruments to be loaded by credit lines.
- What is a credit line?
A line of credit is a maximum borrowing limit set by the bank, allowing customers to borrow whenever or wherever they want until they exhaust the limit. You can consider it a lump-sum loan you have taken but only need to pay the amount you have used.[13]
- What is cash loading to PPI’s?
PPI instrument is basically the person’s buy now pay later wallet, which as per PPI-MD has to be issued by approved Banks and Non-Bank entities, The non-bank PPI issuers are companies incorporated in India and registered under the Companies Act, 1956 / 2013. They can operate a payment system for issuing PPIs to individuals / organizations after receiving authorization from RBI.[14] As per clause 7.5 of PPI-MD 2021, these banks and non-banks can load these PPIs with cash and this cash loading should be limited to a maximum cap of Rs.50,000/- per month subject to the overall limit of the PPI.
Are these PPIs being loaded with a credit line or with cash?
The prevalent issue today is that, upon the creation of a BNPL account, the account, which is a PPI in technical terms, provides the user with a credit limit. For instance, when creating a LazyPay account, the credit limit typically begins at Rs 500. If a user spends Rs 300 out of this limit to purchase products, they would be required to pay this amount later, upon the generation of their bill. This entire process clearly indicates that the operation of these pay-later wallets gives the impression that they are still being funded by the “credit lines” that were previously prohibited in 2022.
One assumption that could be made is that these wallets are probably being loaded with cash at the beginning of every month, based on the overall limit of the PPI. The amount of money used by the person from the BNPL account must be repaid to these accounts, thus perpetuating the cycle. To simplify, let’s consider an example: Suppose A owns a LazyPay account with a limit of 1500. She makes a purchase of 700 between the 1st and 15th of the month and repays the same amount to her BNPL account by the 18th of the month. Therefore, when she repays the amount, her wallet/account gets filled with cash again. However, the increase in credit limit from 1500 to 2000 to further amount gives the impression that the way these BNPL wallets are fueled is clearly a “line of credit,” which is violative of the PPI-MD guidelines of 2021.
How Non-Compliance with KYC Norms lead to loan defaults?
Know Your Customers (KYC) are put in place to guard financial institutions against fraud, money laundering, corruption, financing of terrorism, and other issues. The Know Your Customer (KYC) Direction, 2016 Master Direction’s KYC standards apply to the majority of financial services in the nation. While all BNPL providers and PPI issuers are already subject to KYC standards under MD-PPI Paragraph 6, Paragraph 2.8 permits the issuance of small PPIs without the consumer’s KYC. This clause has been used by several BNPL providers to offer BNPL services without the required KYC. To safeguard the integrity of financial transactions, prevent fraud, and stop money laundering, KYC is essential. [15]
When companies like LazyPay do not request consumers for their KYC, two scenarios could unfold:
- If customers’ KYC is not provided, their Buy Now Pay Later (BNPL) account isn’t registered as a loan account, thus it doesn’t impact their CIBIL Score.
- Without verified KYC, the company only possesses a person’s email address, name, and phone number. Consequently, in the event of loan defaults, their actions are limited to contacting the customer or sending legal notices via email since they lack the customer’s address.
Often, such matters are escalated to collection agencies, which resort to various illegal tactics such as hacking personal contacts, reaching out to family members, using WhatsApp for unrecorded calls, and resorting to verbal abuse and threats against the customer. Instead of resorting to illegal tactics, why aren’t these companies pursuing legal actions against individuals and enforcing mandatory KYC verification? Perhaps they themselves are not adhering to PPI-MD guidelines adequately, which may explain why they refrain from resorting to legal measures to settle loan defaults.
Aftermath:
In short, there are two important aspects to consider when assessing whether these PPI issuers are adhering to PPI-MD guidelines:
- Verification needs to be done by RBI, whether the PPIs are being loaded with cash or credit lines. The current operational method suggests the latter, which constitutes a clear violation of PPI-MD guidelines. Consequently, they should be held accountable under the Payment and Settlement Systems Act, of 2007.
- Need to strengthen the KYC norms before issuing BNPL accounts to individuals, even for smaller PPIs. This would facilitate lending companies in tracking defaulters in the event of loan defaults and transitioning their accounts into loan accounts, which would subsequently impact their CIBIL Score. For example, Amazon Pay Later strictly adheres to KYC norms. Therefore, if a user defaults on a loan, it directly affects their CIBIL Score. Moreover, when individuals like this apply for a Home Loan, they would need to obtain a No Objection Certificate (NOC) from Amazon, which serves to ensure that they have not defaulted on any loans.
Conclusion:
Before proceeding, verify whether the company or application you’re engaging with is a certified lender and is approved by RBI[16]. Additionally, thoroughly review all terms and conditions and conduct thorough research on the company before agreeing to the loan. Despite claims of being no-cost or zero-interest credit, these loans reportedly involve an internal interest rate on the borrowed amount, so ensure the company discloses this in the agreement.
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Written by- Aditi
[1] Rengan, R., & Bfsi, E. (2023, July 15). Navigating the Buy Now, Pay Later Landscape in India: Balancing Convenience and Responsibility. ETBFSI.com. https://bfsi.economictimes.indiatimes.com/news/fintech/navigating-the-buy-now-pay-later-landscape-in-india-balancing-convenience-and-responsibility/101760585
[2] LazyPay | Need help. (n.d.). https://lazypay.in/needhelp/topic/repayment-statement-and-bill-cycle?nodeId=28&child=0
[3] Our partners. (n.d.). LazyPay. Retrieved February 19, 2024, from https://lazypay.in/where-can-I-use
[4]Kasa, R., & Kasa, R. (2023, October 26). Buy Now Pay Later (BNPL): How it Works, Benefits – RazorpayX. Razorpay Learn. https://razorpay.com/learn/business-banking/buy-now-pay-later-bnpl/#:~:text=Regulation%20Around%20Buy%20Now%20Pay%20Later%20(BNPL)%20in%20India,-In%20India%2C%20Buy&text=However%2C%20the%20regulatory%20framework%20for,1934%2C%20and%20other%20applicable%20laws.
[5] Ibid
[6] Amazon Pay Later- Terms & Conditions. (n.d.). Retrieved February 19, 2024, from https://www.amazon.in/gp/help/customer/display.html?nodeId=GAZGBWGE7J9SZ4K7
[7] LazyPay | Need help. (n.d.). https://lazypay.in/needhelp/topic/lazypay-kyc?nodeId=255&child=13
[8] Reserve Bank of India – Database. (n.d.). https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=2491
[9] Reserve Bank of India – Publications. (n.d.). https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=12043
[10] Reserve Bank of India – Master Directions. (n.d.). https://www.rbi.org.in/SCRIPTs/BS_ViewMasDirections.aspx?id=12156
[11] Understanding ‘Buy Now Pay Later’ Industry Regulations by RBI. (2022, October 4). NICKELED AND DIMED. https://nickledanddimed.com/2022/10/04/understanding-buy-now-pay-later-industry-regulations-by-rbi/
[12] Ibid
[13] Kaustubh, A. (2022, June 22). Explained: Why RBI’s new rules are bad news for “buy now, pay later” customers, prepaid wallets and more. The Times of India. https://timesofindia.indiatimes.com/gadgets-news/explained-why-rbis-new-rules-are-bad-news-for-buy-now-pay-later-customers-prepaid-wallets-and-more/amp_articleshow/92393579.cms#amp_tf=From%20%251%24s&aoh=17082759641932&referrer=https%3A%2F%2Fwww.google.com
[14] Reserve Bank of India. (n.d.). https://www.rbi.org.in/commonperson/english/scripts/FAQs.aspx?Id=2812
[15] Indulia, B. (2023, September 27). Banking the Unbanked: BNPL as a Tool for Financial Inclusion in India and the Barriers in Achieving it | SCC Blog. SCC Blog. https://www.scconline.com/blog/post/2023/09/28/banking-the-unbanked-bnpl-as-a-tool-for-financial-inclusion-in-india-and-the-barriers-in-achieving-it/#fn20
[16] Ibid
