What is driving India’s ‘Buy Now, Pay Later’ wave?

    Insights » APAC » What is driving India’s ‘Buy Now, Pay Later’ wave?

    The good, the bad, and the promising of the revolution that is transforming the way Indians shop.

    BNPL in India
    Mahesh Swaminathan

    Mahesh Swaminathan

    Senior Consultant – India Lead

    The payment solution known as Buy Now, Pay Later (BNPL) has emerged as a fast-growing alternative to credit cards in both developing and high-income economies around the world. India has also joined this global wave, and now BNPL is rapidly changing the way Indians shop throughout the country.

    By allowing consumers to pay for their purchases in installments over time, instead of the entire amount upfront, BNPL loans are projected to reach US$14.3 billion in India in 2023. Additionally, the GMV (Gross Merchandise Value) of the industry in India market is expected to grow at a CAGR of 12% from 2023 to 2028, which would take the gross value of BNPL purchases in the country from US$11.6 billion in 2022 to an astounding US$25.4 billion by 2028.

    As in other emerging markets, the meteoric rise of the BNPL model in India has been partially driven by the convenience of these credit-based transactions and their advantages over traditional credit card options. BNPL is quicker, simpler, and available even for consumers who don’t have an employment history or credit score. Still, this payment solution also brings about some specific risks that need to be considered by its users, merchants, and payment providers.

    This article will offer a brief overview of the factors driving the growth of the BNPL market in India, highlighting some challenges and opportunities that BNPL has created in the country.

    Is BNPL a Better Option than Credit Cards?

    Credit cards have been around for decades, making inroads in the payment ecosystem in India. However, the growth of this payment method has faced certain limitations. For one thing, many Indians do not meet financial institutions’ credit score requirements (CIBIL in India), which leads to the denial of access to credit cards. Additionally, card application processes in general involve time- and resource-consuming verification systems. These factors culminate in only 5% of Indians owning a credit card in 2021, as per World Bank data. In contrast, BNPL solutions have offered Indian consumers a frictionless credit experience, even for sub-prime borrowers, allowing payment providers and merchants to expand their clients base to large unbanked sectors of the population.1

    Differences between Credit Cards and BNPL

    Credit CardBNPL
    Interest-Free Credit PeriodUp to 50 daysUp to 15-30 days
    Credit LimitHighLow
    EMI Loan Interest Rates0-20% APR0-32% APR
    Rewards/Cashbacks~1% CashbackLimited
    Merchant NetworkOffline + OnlineOnline
    International AcceptanceYesNo
    Balance TransferYesNo
    Source : HDFC Securities -Fintech Playbook BNPL 2022

    These are some of the main factors contributing to the growth of BNPL adoption in India:

    Easy access: Unlike many countries, India has a strict policy on traditional loans that is based on credit scores. This policy limits access to credit solutions for a significant portion of the population. The BNPL model doesn’t require consumers to have an employment history or a robust credit score — a crucial factor boosting its adoption in a country with a massive informal economy.

    Seamless network coverage: There are high levels of internet and smartphone penetration in India’s large cities, facilitating access to digital lending. In contrast, POS infrastructure is far more limited.

    Consumer preferences: India has a consumer base that is tech-savvy and eager to explore the latest advancements in online shopping, including alternative digital payment methods.

    Zero or low interest rates: In general, BNPL solutions include minimal or no charges if customers repay within the interest-free period.

    No fees: BNPL allows consumers to avoid the hassle of cards’ annual maintenance fees and gives them greater control over their spending.

    Simple sign-up and instant assessment processes (time efficiency): The process of obtaining a BNPL loan at the point-of-sale is notably simpler and quicker than applying for a credit card. Apart from online purchases, even in an in-store purchase, BNPL can be opted at check out with a participating retailer

    Cost-effectiveness: Due to its low requirements in terms of credit risk assessment and analysis of documentation, BNPL is also a relatively low-cost lending method for payment providers.

    Security: Customers do not need to provide their bank or credit card details to various online merchants when acquiring BNPL loans. Only “Know Your Customers” (KYC) details are shared in a secure environment with a BNPL provider, which uses the KYC data to verify and authenticate buyers’ identities.

    New Generations

    The BNPL model of small credit-based transactions is particularly appealing to new generations, such as Gen Z consumers, who no longer expect to juggle between multiple apps to conclude their purchases.

    These consumers prefer to be offered an integrated payment solution at the point-of-sale as part of their end-to-end online customer journey.  That is why integrating BNPL platforms with online retailer websites contributes to boosting customers’ satisfaction and enhancing their overall shopping experience.

    Here is how app-based BNPL solutions work:

    How Buy Now Pay Later works in India
    Source: Prove.com Blog – Buy Now Pay Later, India

    Benefits for Merchants, Banks, and Paytechs

    BNPL solutions allow merchants, financial institutions, and payment providers to expand their respective customer bases by reaching individuals without a substantial credit record and enabling them to purchase products that previously were out of their wallets’ reach. Yet, this isn’t the only advantage of BNPL for these stakeholders — below are a few additional benefits:2

    Lower client acquisition costs for fintechs and other financial institutions offering a BNPL service. The option of signing up new customers for BNPL at merchant checkout provides a low-cost acquisition channel and opportunity to monetize by cross-selling products and affiliate marketing.

     Easier-to-understand terms and conditions of BNPL solutions in comparison to the terms and conditions of credit cards.

    Enhanced customer loyalty: Customers are likely to return to the merchant offering financing options and recommend to friends and family, which can increase the merchant’s customer base.

    Easy implementation: integrating BNPL options into online stores requires minimal adjustments in existing technology solutions with the use of Open Application Programming Interfaces (API) and other platforms.

    Higher average transaction values: BNPL encourages higher-value purchases as customers can fill larger shopping baskets, paying for the products in installments.

    Consumer insights: BNPL platforms give merchants access to consumer analytics instruments, including data on price sensitivity, seasonality, and festive sales. Their data may also help businesses enhance their cross-selling and brand marketing efforts.

    BNPL Ecosystem in India

    With over 700 million Internet users — more than twice the U.S. population — India is rapidly emerging as one of the world’s leading digital economy markets.

    India – a leader in digital economy

    (In millions of people)20232026F
    Access to internet750950-1000
    Online transactors (for banking services)450700-750
    Mobile Payment User (Uses UPI or Digital payments)380650-700
    Source: Reseer Consulting – Future of payments

    The adoption of digital payments solutions in the country was accelerated by the COVID-19 crisis, which prompted widespread digitization and encouraged Indian consumers to buy online. The country’s e-commerce market kept on expanding in the post-pandemic era and the adoption of digital payment options also continued to soar. The so-called Unified Payment Interface (UPI), a real-time payment system developed by the National Payments Corporation of India (NPCI), faced explosive growth during this period.

    The popularization of the BNPL model occurred in this context. That said, India’s BNPL industry still seems to be in the first stages of what promises to be a robust growth cycle. 

    BNPL Players in India. It includes: LazyPay, CashE, Zest, Slice, Flipkart, Flexipay, Free Charge, among others.

    Today, Lazypay leads the BNPL market in India with approximately 39% market share. It is followed by players such as Capital Float (Amazon Pay Later) and Zest Money.3

    Risks & Challenges

    The rapid expansion of BNPL in India implies certain risks that BNPL providers need to be aware of. For instance, there is the possibility that, leveraged by BNPL options, a portion of Indian consumers might end up overspending, and accumulating debts beyond their repayment capabilities. This, in the medium term, could lead to an increase in default rates.

    Below is a list of some risks and challenges associated with the development of the BNPL market in India as well as some successful approaches that have been used to deal with them:

    Access to resources

    Ensuring access to significant financial resources is one of the most significant challenges faced by BNPL providers in India. An efficient solution to solving this issue appears to be forming partnerships with banks and other financial institutions.

    BNPL providers may offer these financial institutions their white-label technology solutions, and, in return, gain access to the institutions’ much larger pool of financial resources.

    Fraud prevention

    BNPL providers also face the risks of fraud, such as identity theft, due to the speed of decision-making in their systems. In this case, the adoption of robust mechanisms for identity verification at the point of onboarding as well as decision-making models based on Artificial Intelligence (AI) and machine learning technologies have been helpful in reducing such risks.

    Credit management

    Managing credit risk is critical to BNPL operations. As the over-indebtedness of consumers could lead to a systematic increase in default rates, BNPL providers must strike a balance between expanding access to credit and ensuring that those obtaining loans have adequate repayment capability.

    For that, BNPL providers need a combination of responsible lending practices and effective credit assessment systems. Initiatives to educate customers on loan terms could also help reduce the risk of non-repayment.

    Some BNPL companies are already enhancing their credit management by implementing stronger credit score models. Ultimately, BNPL data could also help financial institutions build efficient risk assessment models based on consumers’ online credit history.

    Regulatory risks

    Although there is currently no specific regulatory framework for the sector, the Reserve Bank of India has proposed a series of guidelines for BNPL players.

    Companies using BNPL models must closely follow the advance of this initiative to understand the possible implications for their business models.

    Is BNPL the Future of Lending in India?

    While BNPL will not replace the market of traditional credit in India, in the next years it will likely drive the growth of online lending, especially as it has been predominantly used for e-commerce purchases and bill payments.

    The driving forces of the BNPL wave will continue to gain traction in the country — from the expansion of e-commerce to the changing preferences of local consumers. Thus, it is reasonable to expect a robust expansion of BNPL operations as well.

    In particular, the fact that a large section of India’s population still does not have access to credit suggests that the country’s BNPL revolution is only in its early stages, and over the next few years it shall pave the way for a significant shift in the dynamics of the local credit and payments markets.

    The BNPL industry is expected to reach US$25.4 billion in India in only five years, so industry players need to be prepared to mitigate the risks and seize the opportunities that such robust levels of growth will create.

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    Mahesh Swaminathan

    Mahesh Swaminathan has over 20 years of industry experience from the emerging technologies & services industry. As a market strategist, Mahesh advises technology start-ups in the areas of GTM, Digital transformation and consumer insights.