What’s causing the Indian BNPL market to explode

By Puja Sharma

BNPL arrangements, a type of short-term financing that allows consumers to make purchases and pay for them later through regular interest-free installments, are booming in India on the back of surging e-commerce activity and demand for easy loans.

The surge in BNPL activity is part of the broader digital shift observed in 2021, Razorpay noted in its report. Looking closely at the different payment methods used by customers, Razorpay indicated that the United Payments Interface (UPI), India’s instant, real-time payment system, recorded the highest growth, rising 174% from 2020 and 2021. In 2021, UPI was Indians’ preferred mode of payment with a 63% market share, followed by cards (26%), and e-mandates (1.58%).

Razorpay, one of India’s leading payment getaways, had released the 10^th edition of its (COVID) Era of Rising FinTech, outlining the growth it witnessed during the past year. As a result of the pandemic in 2020, digital payments became mainstream in 2021. Compared to the year before, the number of online payments more than doubled in 2021, crossing a billion.

Due to surging e-commerce activity and the demand for easy loans, BNPL arrangements, a type of short-term lending, are booming in India on the back of interest-free installment plans. The company said in late 2021 that BNPL nearly doubled at MobiKwik, another Indian payment services provider. The BNPL segment accounted for nearly a fifth of MobiKwik’s 3,01 billion rupees (US$40m) revenues during the year ending March 31, 2021.

The report studies the remarkable growth in digital payments in 2021, with the preceding year serving as a benchmark. If 2020 saw a boom in digital payments, then 2021 witnessed a veritable explosion. The company experienced 611% growth in its buy now, pay later (BNPL) business in 2021, and 569% growth in 2020.

According to IBS Intelligence data, BNPL-triggered payments are expected to increase at an annual rate of 80% from 2021 to 2025, growing nearly 11 times. In the same period, the share of BNPL in the eCommerce and mobile pos space is expected to reach over 20% from 3-4% in 2021. The growing consumer market and availability of physical cards from BNPL lenders will enable the proliferation of even traditional points of sale.

And the trend is showing no signs of slowing down. Indian Internet-focused consulting firm RedSeer estimates that there were about 10-15 million BNPL users in the country in 2021. That figure is projected to rise to 80-100 million customers by 2026. During that timeframe, the firm estimates that India’s BNPL market will grow over ten-fold to reach $45-50b by 2026 from $3-3.5b in 2021.

A second wave of the pandemic hit the country in 2021, and digital financial transactions played a major role again. As a result of increasing smartphone and internet penetration, online transaction volumes in Tier-2 and Tier-3 cities grew by 45.56% and 54.33 %, respectively. All sectors experienced growth, with Food and Beverage (18.08%), Financial Services (17.99%), Games (13.99%), Utilities (13.70%), and E-commerce (11.85%) among the top contributors.

The report also notes rising digital adoption amongst small and medium-sized enterprises (SMEs), claiming to observe a 1,500%+ increase in wholesale e-commerce between 2020 and 2021.

(The report is based on online transactions held on the Razorpay platform from January to December 2020 & 2021. It provides a detailed view of the evolving FinTech ecosystem, the digital spending patterns of consumers, and an analysis of how different sectors and payment modes performed during 2020 to 2021.)

During the presentation of the Union Budget 2022 on February 01, Finance Minister of India, Nirmala Sitharaman unveiled more initiatives aimed at boosting the digital economy.

Financial support for the digital payment ecosystem, the setup of 75 “digital banking units” in 75 districts, the launch of a so-called Digital University with cutting-edge information and communications technology (ICT) expertise.

Striving to turn the country into a digital powerhouse, India’s public sector has been a key catalyst for rapid digitalization with initiatives such as Aadhaar, a digital identity platform, UPI, and eSign, an online electronic signature service.