Dvara Research Blog | Report: The costs of using Buy Now, Pay Later (BNPL) products

Authors:

Buy Now, Pay Later (BNPL) products have become one of the popular modes for customers to make retail purchases in India. These products are being positioned as challengers to credit cards that can make credit more accessible to customers at little to no cost. Yet, the actual costs customers may incur have not been documented in the Indian context. Our report titled “The costs of using Buy Now, Pay Later (BNPL) products: Understanding the different kinds of costs Indian customers can incur in using BNPL products” attempts to fill this gap.

Our findings in this report put the spotlight on key aspects of the BNPL market, mainly –

i. Monetary costs that customers may incur when they use BNPL products.

ii. Conduct-related concerns that BNPL customers may face and the ensuing non-monetary costs that they may incur.

These findings are meant to help stakeholders gain more insight into the BNPL market and identify customer protection gaps that must be addressed.  

Research Methodology

The methodology we follow in this study presents a useful way to monitor and identify customer protection concerns in nascent product markets. We examined the BNPL market mainly through two different approaches–

1. Analysing terms and conditions (T&Cs) of ten prominent Indian BNPL providers

   . We used the insights from this analysis to (a) develop a monetary costs matrix presenting the different costs customers may incur and (b) identify customer protection gaps that can create significant risks for customers.

2. Using BNPL products personally.

   We registered and made a purchase with a BNPL product from five of the ten providers. This helped us understand the customer experience with each product and identify potential divergence with the charges and provisions mentioned in the T&Cs. These experiences helped us refine our findings in (1).

Findings and takeaways for customer protection

Our findings suggest that customers using BNPL incur monetary costs comparable to costs of using credit cards and are susceptible to adverse risks emerging from gaps in customer protection. Some of our key findings include–

a. The costs customers incur can be divided into pre-default and post-default costs.

Pre-default costs include interest costs, processing fees, autopay fees, carry forward interest, joining fees and card-related charges. The APR on BNPL products varied between 0 to 36%, processing fees varied between 0 to 15% of the sanctioned amount, and other charges varied between INR 0 to INR 500. Post-default costs includes late fees varied with the outstanding amount and was usually between INR 0 to INR 2000. However, for some providers, like Unicard, the fees went as high as INR 3000 for dues between INR 2 lakhs to INR 10 lakhs. It is unclear if the APR charged by BNPL providers is inclusive of all charges. If not inclusive, the monetary costs of BNPL products may be closer to that of credit cards. This will have to be validated with a larger study of costs incurred by customers over time

b. BNPL providers’ T&Cs are misaligned with key customer protection regulations, contravening key conduct obligations

–

• Some providers’ T&Cs and Key Facts Statements (KFS) omitted key details about the BNPL product like the charges customers can incur.

• Financiers retained the right to reject applications unilaterally without giving reasons for rejection.

• Some providers explicitly hold customers responsible for assessing suitability of the credit being offered. Other providers are silent about who is responsible to assess suitability. ​

• Some providers’ T&Cs had potentially unlawful provisions – like a waiver of customer safeguards under usury laws and other laws relating to charging of interest. ​

• Credit reporting practices are rarely disclosed to customers. Providers also do not disclose how using BNPL products can affect customers’ credit scores. 

• Providers’ T&Cs have broad and ambiguous clauses relating to personal data use, giving providers leeway for using personal data for broad purposes. 

• Some providers mentioned the possibility of charging an undisclosed, non-refundable processing fees for customer applications.

(like its costs). This information was not prominently displayed at the start of the onboarding process. These details were only available on the providers’ websites.

Currently, some BNPL providers seem to be settling payments directly with merchants without due authorisation from the RBI.

It appears that BNPL products may fall within the scope of the definition of a credit card under the RBI’s Master Direction on issuing credit cards released in April 2022. If so, BNPL providers may have to make significant changes to their practices and business models.

Our findings suggest that the monetary and non-monetary costs associated with usage of BNPL products are substantial and are not always known to the customer before subscribing to the product. The opacity around the costs combined with some potentially unlawful clauses, reveal serious customer protection risks that BNPL borrowers are exposed to. These findings refute the narrative of BNPL products as low- to no-cost credit alternatives to credit cards.

Further, The BNPL promise of credit inclusion appears to be weakened by a set of factors. The first set of factors can make BNPL products less affordable for customers. These factors include (a) possibly higher delinquency rates among BNPL customers which could in turn increase credit costs for providers and interest costs for future customers, and (b) an increase in costs to customers due to changes in BNPL provider business models and merchants’ pricing arrangements. Another set of factors can make BNPL products and credit less accessible. These include (a) unexplained rejection of customers’ BNPL applications, and (b) inconsistent reporting of customers’ repayments to credit bureaus.  

The methodological approach followed in this study can provide a useful template for market monitoring of nascent but rapidly growing financial products. For instance, our findings from the study suggest that customers are at a risk of (a) unknowingly incurring debt, (b) borrowing credit that is unsuitable for them, and (c) being subject to possible harms from weaker customer protection safeguards. These findings align with those from regulatory investigations into the BNPL market in markets with more mature BNPL products. Regulators and providers must take note of these consequences to devise measures to improve customer protection in the BNPL market. 

The full report is available here.

Cite this blog:

APA

Srinivas, M., & Prasad, S. (2022). Report: The costs of using Buy Now, Pay Later (BNPL) products. Retrieved from Dvara Research.

MLA

Srinivas, Madhu and Srikara Prasad. “Report: The costs of using Buy Now, Pay Later (BNPL) products.” 2022. Dvara Research.

Chicago

Srinivas, Madhu, and Srikara Prasad. 2022. “Report: The costs of using Buy Now, Pay Later (BNPL) products.” Dvara Research.