View: Buy Now, Pay Later fintechs are pulling consumers but still searching for profitability

As a nation cheering its unicorns, it is easy to get carried away. Yes, of course, the importance of digitally savvier businesses that serve hundreds of millions of consumers altogether cannot be shied away from. We have to celebrate each of these ideas.

However, the trouble with the tag unicorn is that most get carried away by the glitz and hype surrounding the tag. Can we allow the Indian unicorns to focus in building a profitable and sustainable business? A business where they profit while serving consumer needs.

Credit has to be given where due. This is credit, of respect and reputation. A number of FinTechs have the ability to underwrite credit using large data sets, a combination of structured and unstructured data sets, and surrogate data sets. Of course, the current regulation steers these FinTechs to operate lending activities under the umbrella of a bank or NBFC or a combination of multiple such regulated finance entities. It is probably when, and not if, the regulator would be far accepting of the strength of FinTechs as a standalone finance industry participants, and not a mere ‘vendor’. The one who has sticky consumers will end up the winner, any regulatory arbitrage notwithstanding.

It is an old product idea, practiced even without digital capabilities decades ago; to suit current media and social media frenzy, has been packaged well and hash-tagged to suit current younger demographics and pronounced as BNPL. Simply put, it is a short-term financing arrangement that allows one to buy a product or use a service, without paying for it upfront. The product merchant pays a commission to the BNPL financier for the arrangement. This financing arrangement is usually given at the Point of Sale (PoS), or in other words when the consumer ‘checks out’ the shopping cart.

BNPL is attracting consumer interest because it finances consumption. But from a business point of view, the BNPL industry is yet to showcase a sustainable profitability path. Probably the reason why investments in BNPL is decreasing, but for a few outliers.

The recent Master Direction released by the RBI on credit cards and debit cards makes it amply clear the role for many Fintech platforms; that the role of the co-branding partner entity would be limited to marketing and distribution of the cards. Further, the co-branding partner cannot have access to information relating to transactions undertaken through those cards. So those FinTechs which had cards business as their calling card, as well as the ability to use those card transactions to be used as credit underwriting tools are left out of that lending race.

One of the large BNPL players in India, a minted Unicorn, who had scaled up well as a credit card challenger, has now decided to cow down on that model. It had tied up with banks to issue BNPL cards, essentially prepaid payment instruments (PPIs) having a fixed credit line. The platform lents to primarily millennials, from sub-prime and new-to-credit customers. It was supposedly issuing close to 3,00,000 cards per month; a number that put card customer acquisition networks of large banks to shame. It had built good consumer traction by allowing its consumers to make repayments into 3 installments without any charge. It grew its business smartly by dynamically increasing credit limits for its consumers, as they spend more and if they were consistent in repayments. Recently, it had decided to move away from easy credit access to allowing BNPL feature only for those customers with excellent repayment history and or decent credit scores. The excluded customers will have to repay at the end of their 30-day credit cycle or accept to pay in six or more installments along with interest.

The platform is now looking (claiming) to driving up transactions with its merchant partners on its app to accelerate revenue, earning a share of its transactions. It also would reduce its credit risks, a smart move indeed.

Probably it had feedback from its lending platform on NPAs or credit-approval-decline ratio. Or saw a revenue slide. Probably the tell-tale signs of BNPL cash-burn until the model stabilised gave way to fresher (and zealous) pronouncements about growing another business vertical within its fold. Not to underestimate the further-anticipated regulatory scrutiny, and the new regulations around co-branded cards make it difficult.

With the cards business probably not in sight for the short term, with BNPL not looking either scalable or profitable, what happens to the old claims in being a credit card challenger? Smartly it has ‘pivoted’ (yet another fashionable startup lingo) its focus in becoming a payments player. And on the back of it, even recently raised a decent chunk of fresh funding, reportedly part of a larger funding round coming up.

But how many payments brands have built a sustainable revenue and profitability track at scale, yet?

Is this an indication of the path ahead for other such participants in the sector?

What happens to other BNPL players?

Is it the question of investors not ‘Buying-into-it Now, Performance Later’?

What is the fate of FinTechs offering co-branded cards?

Do these indicate to regulatory licence-arbitrage victory for the traditional banks?

Will these mean that FinTechs would be pushed to become ‘supply chain partners’ to banks?

Is this the subject of regulations steering consumer solutioning? Or even limiting the technology choices?

With profitability being suddenly talked about in investing pitches, is this the sign of private-investing-mood ahead?

About this particular platform, surely the private investors will “slice” its performance, financials, and preparedness to ‘pivot’ again during the subsequent fundraise. Importantly the consumers will just do the same from their product convenience requirements. The narratives for any FinTech about consumer loyalty in the face of newer and emerging digital choices is debatable, and the jury is still out. And critically the regulator will watch this platform keenly, as traction in the business picks up and if consumer grievances reach them beyond a certain level. Such is a #Slice of life.