By Sarthak Gupta
*Sarthak Gupta is a fourth-year law student at the Institute of Law, Nirma University.
Introduction
Buy Now Pay Later (BNPL) refers to a point-of-sale financial product where a borrower is allowed to purchase products on a deferred payment basis and pays in a predetermined number of installments. At present BNPL industry is booming and set to surge over ten-fold as tens of millions of online shoppers get lured by it.[1] However, BNPL has also raised certain fundamental concerns globally[2] from the consumer perspective including in India. Recently, the Reserve Bank of India sought data from BNPL providers regarding their working, reflecting a growing regulatory interest in the BNPL market in India.[3] Through this article, the author would like to discuss consumer concerns and the legal regulatory gap that exist today with reference to BNPL market in India.
Consumer and Risk Involved
BNPL is surely one of the most talked about financial services trends in recent times. More and more consumers are embracing its ease and convenience, and retailers are benefiting from higher conversion rates. It is a new cost-free way to access credit easily and simply. However, every side has two stories, the same is the case here. Although there are numerous benefits to BNPL, there are certain harms and risks involved also. In this part, the author will try to decipher those risks and harms, especially from the consumer perspective.
I. Affordability
The Revenue Model of Buy Now Pay Later providers mainly depend upon three sources i.e., Merchant Transaction Fee, Late Payment Fee, and App Monetization Charge.[4] Among these sources also, it is the Merchant Transaction Fee that is the primary source of revenue for the BNPL provider.[5] It reflects that in the real sense, the target customers of BNPL providers are not borrowers, but the merchants with whom they engage They market themselves to retailers on the basis that consumers spend more when they use BNPL offers than they would be paying by traditional methods. As a result, merchants are ready to pay a charge to BNPL providers to cover the cost of lending. When this works, all three parties benefit, the consumer, the merchant, and the BNPL provider. However, there is a risk that a close relationship between the BNPL provider and the merchant would harm the customer. It is possible that the presentation of BNPL offerings and the whole customer journey will be geared to push sales without regard for affordability commitment, a prime consideration before granting any kind of credit.
II. Ambiguity
BNPL offers are often presented as just one of the payment methods in a long list of almost indistinguishable options, as a result, consumers don’t necessarily view BNPL offers as credit, but just as another payment/financial service method.[6] It puts customers at risk because they may not apply the same amount of scrutiny to their decision-making as they would for other credit products, such as taking into account the possible implications of failing to repay. The E-Commerce Payments Bill in Sweden, which went into effect in July 2020 recognized this problem and hence provided credit alternatives from being provided before debit options on online retail platforms.[7] As a result, BNPL offerings cannot be promoted as the “first choice” above the lowest cost direct payment alternative.
III. High-Levels of Indebtedness
The Regulatory bodies around the globe are concerned regarding the risk of financial distress posed by the BNPL services.[8] As discussed above, one of the key sources of revenue for the BNPL provider is the Late Payment Fee which keeps on getting compounded with each passing day hence the risk of consumers falling into a vicious cycle of debt, also keeps on rising. It may be argued that even a similar risk is also possessed by the Credit Card and it is one of the most widely used products for the purpose of credit. However, it has to be understood that most BNPL providers complete a very basic credit assessment, usually through a combination of soft credit searches and previous repayment history, which makes the cost of switching between the platform for consumers almost nil. An analysis by Financial Conduct Authority in the UK revealed even though the average amount borrowed per BNPL platform is comparatively quite small (almost between £65 and £75) however multiple outstanding transactions across different providers and almost a nil switching cost between the platforms makes it relatively easy for a consumer to amass around £1000 of BNPL credit using multiple lenders, and this when the focus of BNPL provider at present is predominantly on fashion and accessories when this focus shift to higher-value item, this can become a big headache for both the regulators and the consumer.[9]
Legal Lacuna in India
Some of the world’s largest and most renowned BNPL markets, including the United States[10], the United Kingdom[11], Australia[12], etc have recently come under regulatory scrutiny. India has been slightly behind the curve with respect to the regulations, only recently Reserve Bank of India has specifically sought relevant data from BNPL providers with respect to their working and other aspects.[13] A few months back Reserve Bank of India has also published a detailed 150 plus page report on Digital Lending[14], however, the prime focus of the report was on Online Instant Loan platforms.
Entities engaged in BNPL services are broadly divided into two categories – Balance Sheet Lenders (BSLs) and Lending Service Providers (LSPs).[15] BSLs are entities in the business of lending that carry the credit risk in their balance sheet/provide capital for associated credit risk. These are often RBI-regulated enterprises (RE), like banks, non-banking financial firms (NBFCs), or other businesses registered to conduct out lending operations under State Money Lenders Acts, Chit Funds Act, 1982, etc. LSPs are essentially technology-centric entities that act as ancillary lending service providers. They are not in ‘business of a financial institution’ as defined under the Reserve Bank of India (RBI) Act, 1934, and the loans, which are sourced, appraised, or serviced by them, are not their assets. They are a marketplace that helps to connect the lender and the borrower. In India majority of BNPL providers fall under the latter category i.e., they act as LSPs. These platforms act in partnership with BSLs for example one of the leading BNPL providers in India, named LazyPay (LSP) has partnered with an NBFC named PayU Finance India Private Limited (BSL) to conduct its lending operations smoothly.
When LSPs act in partnership with regulated BSLs entities such as Bank and NBFC, their activities are governed by certain detailed guidelines, for instance in the case of partnership with Banks, 2006 RBI issued Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services[16] are applicable. These guidelines take into consideration various risks including strategic risk, reputation risk, compliance risk, operational risk, etc., and provide detailed direction with respect to important subjects such as Confidentiality, Security, Responsibilities of Recovery Agents, etc. However, there are no similar guidelines on outsourced activities by other BSLs (which are not regulated), thus precluding the LSPs from partnering with them from compliance to any rules and regulations.
Further, these transactions are not reported to the Credit Information Company as they do not fall under the definition of ‘credit’ as there is no interest charged on these transactions.[17] In India, there are 4 Credit Information companies named The Credit Information Bureau Limited, Equifax, Experian Credit Information Company, and High Mark Credit Information Services, and they are governed by Credit Information Companies Regulation Act, 2005. As per Section 15 read Section 17 of the Act, it is mandatory for credit institutions to join any of the credit information companies and provide details to that company with respect to the credit facilities granted or to be granted, by a credit institution to any borrower, however, these transactions remain not affected by these provisions. This creates a blind spot in lending[18] and an environment of lack of transparency where a regulated credit provider never gets a complete picture of a customer’s financial position when assessing affordability, creating a clear recipe for some serious financial crisis in the long run. There are further various other issues associated with BNPL like first loss default guarantee, grievance redressal measure, etc of which also there is no clear answer at present.
Conclusion
Even though BNPL platforms have a lot of benefits like the ease of credit access, no interest charges, etc., however, there are certain detrimental harms and risks associated with it also as discussed aforesaid. Hence in the view of the author, there is an urgent need to regulate the BNPL platform in India on various aspects like a clear guideline on outsourcing by Balance Sheet Lenders, reporting of transactions to credit bureau, first loss default guarantee aspect, etc.
[1] BNPL Industry Set to Surge Over Ten-Fold in India, BW BUSINESSWORLD (Nov. 09, 2021), http://www.businessworld.in/article/BNPL-Industry-Set-To-Surge-Over-Ten-Fold-In-India/09-11-2021-411290/.
[2] Brian Murphy, Rapid Growth of Buy Now Pay Later Market Raises Global Consumer Protection Concerns as CFPB Watches and Waits (For Now), JD SUPRA (Oct. 25, 2021), https://www.jdsupra.com/legalnews/rapid-growth-of-buy-now-pay-later-8246896/.
[3] Raghu Mohan, RBI seeks details of NBFCs’ ‘buy now, pay later’ deals with e-tailers, BUISNESS STANDARD (Jan. 19, 2022), https://www.business-standard.com/article/finance/rbi-seeks-details-of-nbfcs-buy-now-pay-later-deals-with-e-tailers-122011900037_1.html.
[4] Warikoo, Buy-Now-Pay-Later Explained, YOUTUBE (Jan. 04, 2022), https://www.youtube.com/watch?v=9vUuxP4QzGM.
[5] India Fintech Diaries, BNPL – A deep dive into the world of BNPL, YOUTUBE (July 16 ,2021), https://www.youtube.com/watch?v=9vtJKB1KW8U.
[6] FINANCIAL CONDUCT AUTHORITY, THE WOOLARD REVIEW – A REVIEW OF CHANGE AND INNOVATION IN THE UNSECURED CREDIT MARKET, 47 (2021), https://www.fca.org.uk/publication/corporate/woolard-review-report.pdf.
[7] New rules in Sweden to discourage online shoppers from paying with credit, NORDEA (June 29, 2020), https://insights.nordea.com/en/business/new-rules-in-sweden-to-discourage-online-shoppers-from-paying-with-credit/.
[8]BNPL Under Global Regulatory Scrutiny, With UK as Likely Frontrunner, PYMNTS (Dec.09, 2021), https://www.pymnts.com/buy-now-pay-later/2021/bnpl-under-global-regulatory-scrutiny-with-uk-as-likely-frontrunner/.
[9] FINANCIAL CONDUCT AUTHORITY, THE WOOLARD REVIEW – A REVIEW OF CHANGE AND INNOVATION IN THE UNSECURED CREDIT MARKET, 47 (2021), https://www.fca.org.uk/publication/corporate/woolard-review-report.pdf.
[10] CFPB Begins Scrutinizing Companies Using ‘Buy Now, Pay Later’ Credit, THE NATIONAL LAW REVIEW (Dec. 20, 2021), https://www.natlawreview.com/article/cfpb-begins-scrutinizing-companies-using-buy-now-pay-later-credit.
[11] UK government sets out regulation of Buy Now Pay Later (BNPL), LEXOLOGY, https://www.lexology.com/library/detail.aspx?g=2f09844a-5a0b-43f7-af2b-7cc11ca27dab.
[12] Australia Takes the Lead in Buy Now Pay Later Regulation, PAYMENTS JOURNAL (Apr. 07, 2021), https://www.paymentsjournal.com/australia-takes-the-lead-in-buy-now-pay-later-regulation/.
[13] Raghu Mohan, RBI seeks details of NBFCs’ ‘buy now, pay later’ deals with e-tailers, BUISNESS STANDARD (Jan. 19, 2022), https://www.business-standard.com/article/finance/rbi-seeks-details-of-nbfcs-buy-now-pay-later-deals-with-e-tailers-122011900037_1.html.
[14] RESERVE BANK OF INDIA, REPORT OF THE WORKING GROUP ON DIGITAL LENDING INCLUDING LENDING THROUGH ONLINE PLATFORMS AND MOBILE APPS (2021), https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR124479A17DED84DD4CCDAE790BCAC26F072C.PDF.
[15] India Fintech Diaries, BNPL – A deep dive into the world of BNPL, YOUTUBE (July 16, 2021), https://www.youtube.com/watch?v=9vtJKB1KW8U.
[16] Reserve Bank of India, Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks (Issued on Nov. 03, 2006), https://rbi.org.in/scripts/NotificationUser.aspx?Id=3148&Mode=0.
[17] Sunainaa Chadha, How to make ‘buy now pay later’ work for you, THE TIMES OF INDIA (Jan. 07, 2022, 07:40 PM), https://timesofindia.indiatimes.com/india/how-to-make-buy-now-pay-later-work-for- you/articleshow/88737863.cms#:~:text=%E2%80%9CBNPL%20transactions%20are%20not%20reported,may%20be%20converted%20into%20EMI.
[18] Ridhima Saxena, Popularity of ‘Buy Now, Pay Later’ Creates A Blind Spot in Lending, BLOOMBERG QUINT (Jan. 19, 2021, 08:41 AM), https://www.bloombergquint.com/bq-blue-exclusive/popularity-of-buy-now-pay-later-creates-a-blind-spot-in-lending.