Impact of Buy Now Pay Later on your Credit Score

Deep smartphone penetration and low-cost internet saved payments from card-and-cash supremacy, seized investment from D-street gatekeepers, and liberated credit from big banks’ ivory towers. Access to these services is now in the hands of the public for the first time.

Users from tier 2 and tier 3 cities, as well as younger demographics, are leading the way in terms of adoption. There’s no denying that digital literacy in India is at an all-time high. Has financial literacy, on the other hand, followed suit?

Not. There is a mismatch between access to digital financial services and financial literacy, according to reports on how the popular Buy Now Pay Later (BNPL) financing negatively affects credit ratings.

Many BNPL users have flocked to Twitter in recent weeks to complain about lenders taking out loans on their behalf “without their authorization,” with a recurring theme being that customers were “horrified” to discover that they had accounts open with lenders without any prior engagement.

In light of mounting worries about unethical digital lending practices including forceful collections and the proliferation of phoney apps, such accusations are easy to believe. However, such “warning tales” are causing more harm than good. The issue is not with the BNPL product, but with the lack of knowledge surrounding it.

Mechanism of BNPL

BNPLs and digital credit lines have helped thousands of underserved customers gain access to formal financial services. These solutions assist consumers with limited credit histories in meeting their basic needs and even purchasing aspirational goods and services. They’re a tempting answer for cash shortages or liquidity issues.

These items may appear to users as nothing more than in-app payment choices, and with good reason: they are presented as such. In contrast to credit cards and loans, BNPL is frequently marketed as a no-cost financing alternative with flexible repayment terms. Customers will discover, however, that the principles of such financing are not dissimilar to those of traditional credit if they read the fine print.

BNPL Partnerships

A lender, such as a bank or an NBFC, facilitates BNPL, also known as point-of-sale financing, on a host e-commerce or retail-tech platform. In effect, the platform exposes its users to credit solutions that are suited to their needs. The money needed to make the purchase is put up front by the lender.

A FinTech player usually facilitates such cooperation by building the infrastructure required to connect the platform to the lender. It also manages all loan workflows, including underwriting, servicing, and disbursement.

Impact of BNPL on Credit Score & Platform NPS

BNPL is a two-edged sword: when used wisely, it may unlock a slew of benefits, but when used carelessly, it can damage clients’ credit scores. However, it is false that simply possessing a BNPL facility will affect one’s credit score. This is because credit ratings are affected by repayment hygiene as well as other indicators such as overall leverage. As a result, the majority of people’s credit scores would only suffer if they defaulted/delayed on any of their credit cards, credit lines, or BNPL overdrafts.

In addition, unlike other credit products, BNPL provides a great deal of flexibility in terms of repayment terms and instalment amounts, typically at no extra charge. Many BNPL providers allow consumers to pre-close their loans at any time. Despite these advantages, if a consumer fails to pay their bills, it is reported to credit bureaus, lowering their credit score.

BNPL Builds Credit Scores

The fact that BNPL gives new-to-credit customers a chance to construct substantial credit histories is being disregarded in the hullabaloo about BNPL lowering credit ratings. In addition to bureau data, BNPL providers use other data to assess their creditworthiness, allowing individuals to receive official financial services for the first time. Customers can build excellent traditional credit ratings by making on-time payments, using credit responsibly, and extending the term of their borrowings.

For platforms, it’s a mixed blessing as well. There’s evidence that BNPL helps businesses develop by cutting cart abandonment rates and enhancing consumer satisfaction. However, if the platform’s auxiliary services, such as payments and credit, appear deceitful and harm customers’ financial interests, in the long run, the platform’s net promoter score (NPS) is sure to suffer.

Final Thoughts

There is no such thing as a free lunch when it comes to money. However, BNPL comes as close to a free lunch as possible. It provides more inclusive funding that is based on merit rather than collateral, such as consistent cash flows. Customers also get a smooth purchase experience and have complete control over repayment.

However, the current narrative portrays BNPL as a dubious financial business, similar to phoney loans or cons. It severely undercuts a transformative step toward financial inclusion, risking further alienating India’s already hesitant credit users. As a result, the necessity of the hour is to bridge the financial and digital literacy divide.

Platforms, fintechs, and partner lenders must increase their consumer education efforts to explain the merits and drawbacks of novel credit products like BNPL. The terms and restrictions of its use are frequently buried in the depths of help and FAQ sections. Instead, they must accept that BNPL is, at its core, a credit product, but one that is tailored to the needs of a rapidly digitising world.