Strategy Note /
India

India's massive BNPL opportunity

  • India has just 35mn unique credit card users but 250mn online transactors; there is a huge BNPL opportunity

  • The BNPL user base should increase from 10-15mn now to 80-100mn by 2026, accounting for 15% of online consumer spending

  • Credit risk costs appear high; controlling these are key to the sector’s success. We expect more regulatory oversight

India's massive BNPL opportunity
Rohit Kumar
Rohit Kumar

Global Financials/Thematics

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Rahul Shah
Rahul Shah

Head of Financials Equity Research

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Tellimer Research
7 December 2021
Published byTellimer Research

India’s low formal credit penetration, rising digital payments adoption and growing e-commerce spending represent a major opportunity for the Buy Now Pay Later (BNPL) segment. Currently only 10-15mn people are using BNPL, but this number could reach 100mn by 2026, when 15% of all online consumer spending is expected to route through BNPLs.

There are several benefits of BNPL products for both consumers and merchants but controlling credit risk will be key to the sector’s long-term success. Regulators are also likely to become more active in this space, defining risk management guidelines and capital requirements.

Overall, we expect India’s BNPL industry to experience robust growth; companies with strong financial muscle and strategic partnerships are likely to benefit the most.

India offers an attractive environment for BNPLs to thrive

India has one of the lowest credit penetration rates among emerging markets. There are only c35mn unique credit card users in the country, representing c3.5% of the adult population.

As per World Bank 2017 statistics, only 8% of adults borrow from a formal financial institution or use a credit card; this figure is much lower than in other populous emerging markets, such as China (23%) and Brazil (26%).

Individual borrowers by source of financing

Digital payments, on the other hand, are thriving in the country, providing fertile ground for digital lenders. Monthly unified payments interface (UPI) transactions have grown from US$30bn in 2019 to US$100bn now. There are already over 250mn online transactors in the country, a number that is expected to grow to 700mn in the next five years. 

Consumer online spending is also expected to grow strongly over the next five years, exceeding US$300bn from current US$90bn; Online retail, groceries, and gaming will likely be the key growth drivers.

Online consumer spending trends in India

BNPL consumer base to reach 100mn, accounting for 15% of consumer spending by 2026

India’s BNPL industry is currently cUS$3bn-3.5bn (annual transactions), as per RedSeer estimates. It is expected to grow 15x over the next five years to cUS$50bn, equivalent to over 15% of the total consumer internet spending market.

According to these estimates, the BNPL user base should grow from 10mn-15mn currently to c80mn-100mn by 2026.

India’s BNPL opportunity

Source: MobiKwik, Tellimer Research

Managing defaults is the key to BNPL success

BNPL is an attractive product for consumers and could trigger higher spending behaviour than with credit cards, due to higher convenience and lower costs. This could lead to unsustainable levels of debt for consumers. For their part, BNPL operators, particularly in their early stages, might take on high-risk business to maximise their revenue growth (upon which firm valuations are typically benchmarked).

Delivering low delinquencies along with rising volumes is important for the success of BNPL operators, in our view. Consider the example of MobiKwik’s BNPL arm (MobiKwik Zip), which is performing strongly (barring June 2020-December 2020 due to Covid-19). Its FY 21 (July-June) credit cost was a major drag on performance, accounting for 98% of revenues and 20% of gross merchandise value (GMV). One reason for this was a temporary surge due to Covid-19, but FY 20 credit costs were c70% of revenues and 10% of GMV, which is also high, in our view.

MobiKwik BNPL segment results

Expect more regulatory oversight

Excessive use of BNPL could damage consumer and merchant confidence in the product, and online commerce more generally. Accordingly, we think Indian regulators could step in to implement stricter risk management rules, including credit limits, capital requirements and prudent loan provisioning.

Therefore, we think BNPL operators with strong financial muscle, and those with strategic partnerships to access vast consumer data, have a significant competitive advantage.

Indian BNPL operators to watch

LazyPay

LazyPay is a BNPL platform owned by PayU, a payments gateway platform for e-commerce merchants. We have previously highlighted the importance of strategic fit between BNPL and payments infrastructure companies. LazyPay has several products ranging from a zero-cost 15-days pay later service to monthly payments staggered up to 12 months. The company also offers personal loans up to INR100,00. LazyPay allocates different credit limits to each user depending on their profile and these credit limits can be accessed easily and quickly through its online channels.

MobiKwik Zip

Mobikwik Zip, is a BNPL product by MobiKwik, a leading consumer payments platform in India. MobiKwik Zip lets customers pay for their purchases after 15-days at no additional interest. The company also offers Zip EMI, a longer duration (up to 18 months) product with an interest charge. MobiKwik Zip has annual revenues of INR600mn with GMV of cINR3bn. MobiKwik Zip strongly benefits from MobiKwik’s strong customer base (over 100mn) and merchants network (3.4mn).

Paytm Postpaid

Paytm Postpaid is a BNPL product from Paytm, a leading financial super app in India, offering payments as well as lending, investments, insurance and e-commerce products. Paytm collaborates with other financial partners to offer consumers flexible payment options across its 21mn-strong partner merchant base. Consumers can pay for their spending the following month through UPI, Paytm Wallet, debit card or net banking. The company also offers longer-duration monthly payments for a nominal interest rate. Paytm Postpaid benefits from Paytm’s strong merchant base from its e-commerce and payments gateway business in terms of network as well as data points to assess credit risk.

Simpl

Simpl was launched in 2015 and it enables e-commerce merchants to accept credit-based payments through its simple, yet very efficient, one-click checkout experience. It has 7mn users and 55,000 merchants on its network. Simpl claims to have built a strong credit-risk assessment model using machine learning and backed by a vast amount of data.

ZestMoney

ZestMoney was established in 2015 and is one of India's largest and fastest-growing BNPL companies. ZestMoney serves 6mn consumers through its partner network of 3,000+ online and 15,000+ offline merchants.

Other popular BNPL providers in India include FlexMoney, ePayLater, OlaMoney Postpaid, Amazon Pay Later, Flipkart Pay Later and Capital Float.