Deconstructing ‘Buy Now, Pay Later’ Fintech Products

Nityanand Sharma, Co-founder and CEO of Simpl, explains exactly how Pay Later works

Asian consumers are not fond of the credit card. Debt-averse due to high interest rates and fees, cash-on-delivery has become the preferred payments method in several Southeast Asian markets.

It would be unfair, however, to generalize the use of the credit card across the Asia Pacific region. While consumers in Japan, Hong Kong, South Korea, New Zealand, and Australia prefer credit cards, in countries such as Vietnam, India, Indonesia, and the Philippines, credit card penetration is in meager single digits.

The latter group also characteristically has lower levels of financial literacy and significant unbanked or underbanked populations (Google, Bain and Temasek; Scroll).

What is also characteristic of these markets, however, is the increasing use of smartphones and the rising Internet penetration in these regions. This posits a unique opportunity for fintech startups to rise to the occasion and offer opportunities for credit-based financial products to consumers in these markets.

“Consumers want credit. They want credit for convenience, and sometimes they want credit for affordability, but in both cases they want to make sure they are in control,” says Nityanand Sharma, Co-founder and CEO of India-based fintech Simpl.

Sharma adds that this is fueling the growth of a specific product in the fintech segment called Buy Now, Pay Later (BNPL), or simply, Pay Later. Pay Later is a way of offering consumers zero-interest short term microcredit for online purchases, such as food, clothing, or even travel.

During checkout, customers can simply check the Pay Later option for payment through whichever vendor the website has partnered with, rather than going through the motions of entering card details, a PIN number, or a one-time password.

Similar to credit cards, these services also come with a credit limit and a settlement cycle (usually bi-monthly), but unlike their plastic counterparts, users can complete payments in one click through Pay Later products.

Simpl is itself a Pay Later company, joining the likes of AfterPay and zipPay in Australia, Ovo PayLater in Indonesia, or its direct competitor in India, LazyPay. Companies such as Amazon, or even Southeast Asian unicorn celebrities Grab and GO-JEK have also launched their own Pay Later products.

How Pay Later is Structured: The Simpl Example

Sharma spent about 10 years at Wall Street, working for the likes of Bear Stearns and Goldman Sachs between 2002 and 2014, until the entrepreneur bug bit him. He returned to his homeland and was entertaining thoughts of starting his own hedge fund, until his credit card application was abruptly rejected.

The bank denied his application for a simple reason: having lived abroad ever since he had moved to New York for grad school, he did not have a credit score in India. This got Sharma thinking about the relationship that Indian consumers have with the credit card.

“The question I asked was, in today’s world where everybody [is] connected to each other on smartphones with unlimited compute power, and people are buying on smartphones, what does a ‘new’ credit card look like?” he says.

Eventually, he started Simpl with Co-founder Chaitra Chidanand in 2015, a “two-sided marketplace” that works on revenues from merchants as well as customers.

Simpl has two key revenue streams. On one hand, it charges merchants 1.7% of transaction value, on the lower end of the 1.5% – 3% that merchants pay for credit card transactions in India.

Simpl is free to use for end-customers who pay their bills on time, but it charges customers a late fee at a flat rate of INR 100 (US$1.33 at current rates). This is its second revenue stream, intended to cover up any losses that Simpl may make. If a bill is left unpaid for 10 days, the user is blocked from using the service.

With a default rate of 1.1% for non-payment, and revenues of 1.75% per dollar spent on Simpl, the model works on razor-thin margins. But Sharma has his eyes set on bigger sights.

“The opportunity in India is not to build a credit card, but to reimagine the whole thing,” he says.

Sharma believes that ecommerce is on the cusp of a consumer migration, away from credit cards and towards Pay Later. In the long term, he sees Simpl as a much more customized and consumer-friendly version of the credit card.

Driving the Pay Later Trend

Pay Later is built for the young, urbanized millennial who is native to mobile and ecommerce. Asia is a lucrative market in this context, since 58% of the world’s millennials are situated in the continent.

This demographic is the sweet spot for companies like Simpl, because they are acclimatized to online shopping, and at the same time, have the purchasing power to spend. For these Gen Y shoppers, the credit card has become an old-school experience, Sharma says.

“When you think about a more connected consumer class, a consumer class who’s expecting a high degree of transparency and great user experience, it just doesn’t work, which is where the opportunity for Pay Later is coming out,” he adds.

The problem with credit cards, he continues, is that rolling balances can accrue to the point where credit card holders realize, often too late, that they have been spending excessively. This makes them averse to debt, but they still want credit for convenience, affordability, or for loyalty rewards, without it affecting their credit score.

This is the gap that Pay Later products plug themselves into. At Simpl, for instance, consumers do not pay interest rates, nor does their spending balance affect their credit rating.

The product is aimed at consumer convenience, Sharma says, meaning that it is focused on making the shopping experience more seamless for users, rather than acting as a line of credit for when the wallet feels lightweight.

Lucky for Sharma, Simpl’s positioning could perhaps not get any better. Digital lending was already on its way to representing the largest revenues in digital financial services in Southeast Asia by 2025. And though COVID-19 has had an adverse impact on digital payments as a whole, digital payments for utilities has experienced a surge.

Sharma believes that though people are wary of credit, Pay Later products such as his own, that are based on data and an end-to-end digital experience, can shift the paradigm.

“It is a very simple thing to onboard. It encourages good spending behavior, it encourages budgeting, it encourages timely repayment and so on,” he says. The key, he notes, is in building consumer trust in new credit products such as Pay Later.

This, in turn, can help push the boundaries of market size further outwards through what is arguably the best marketing tool–word of mouth.

“10 years back, it would be considered insane to travel abroad and live in someone’s house. Similarly, it would be pretty insane to think [of] taking a lift in random people’s cars. And yet, we fundamentally travel differently in 10 years,” he explains.

“The reason that is happening is these products are built to have multiple interactions with the consumer, and through that, build a sense of comfort.”

Make Informed Pay Later Purchases

A key point to note here is that there are two types of Pay Later products. One provides convenience by aggregating payments for users to clear in what is usually a bi-monthly or monthly cycle. Simpl, AfterPay, and most other micro-credit companies fall in this category.

The second category of BNPL companies is aimed at affordability, such as what Klarna or PayPal credit may offer. These work largely like credit cards, with a credit cycle of up to a few weeks, credit score implications, and a tiered system of payments settlement.

“A lot of these things on the surface looks the same, but at the fundamental level, the differentiator comes from what the consumer experiences­­,” Sharma further adds.

The consumer experience includes checkout, bill generation, bill repayment, defaulting payments, and dispute resolution, he continues.

A healthy financial practice is to read the fine print before availing these lines of credit, at the risk of overspending and falling into a debt trap, as each product operates differently.

BNPL products are not homogenous as one may incorrectly think. However, by understanding exactly what these products offer, and what they require from users in return, consumers can avail a potentially useful service that addresses the desire for a smooth and well-packaged fintech experience.

Data protection

Like most digital products, Pay Later also uses data to dictate consumer experience and risk management. And this may warrant differing degrees of caution, depending on where in the Asia Pacific region the consumer is located.

For Simpl, using data is paramount to their underwriting process. In fact, how it uses data science through machine learning is a piece of prized intellectual property within the company.

“The problem in [most emerging markets] is that credit history is very thin, meaning most people just don’t have it. And in the absence of credit history, it’s very hard to give credit, which is where we, and other companies like ours, are doing a lot of innovation,” Sharma explains.

The company uses alternative data, mobile data, purchase data, and location data, to understand the extent of the line of credit it can give a user. The information can be both personal or non-personal in nature. As the user builds their repayment history, the credit line ceiling moves up.

“Everything around consumer data is opt-in,” he says, and users can choose to share more data with the company if they want bigger lines of credit.

Sharma adds that Simpl is compliant with the European Union’s stringent General Data Protection Regulation (GDPR) because it works with merchants who need to be GDPR compliant themselves.

Data is integral to the customer journey for any product, and users should ideally have full control over who has what data, and how it is being used. To this end, a second healthy practice is to understand the privacy policy of the companies offering Pay Later services, and how user data will be utilized, before buying into the service.

Header image courtesy of Simpl


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