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Credit Where Credit is Due - The Buy Now Pay Later Frenzy

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Credit Where Credit is Due - The Buy Now Pay Later Frenzy

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Remember playing the board game Monopoly? Not the swanky new one with the digital money cards. I’m talking about the good old Monopoly with colourful notes ranging from ₹1 to ₹10,000.

If you’ve ever had a bad spell in the game - you’d know the sinking feeling of watching your pile of cash deplete. 

What’s fascinating is that this has a lot to do with the mode of payment - tangible cash. Something that’s described in the book The Payoff– How Changing the Way We Pay Changes Everything by Gottfried Leibbrandt and Natasha De Terán.

They say that there’s “much less experience of the pain of payment” while paying with a tap of your phone or swipe of a card. 

Now, imagine what would happen if you eliminate this pain completely? Meaning, you pay for what you want and there’s no dip in your finances (not immediately at least).  

It's the perfect recipe for a Dopamine riot.

This is why Credit and BNPL (Buy Now Pay Later) schemes have caught on like wildfire. 

BNPL pros and cons

Scroll through Instagram and you’ll see a hundred quotes to the effect of “Stay in the present”, “Live like you there’s no tomorrow” or “#YOLO” 

While this may work as life advice, it’s horrible financial advice. But as a generation, we’ve imbibed this way of living. This is what makes credit payments so alluring. When you enter into a BNPL transaction there’s no immediate sting of money going away, and so it’s simpler to forget about the future sting as well. We’ll cross that bridge when we get there

What tends to happen, though, is that when you reach that bridge, you might be ready to cross it. This is because the not worrying for the future part of your brain couldn’t fathom that you needed to save in the present to be able to pay in the future. 

There’s no denying that BNPL has a lot of allure. The fact that there are no credit checks to enter into the scheme makes it widely accessible even to people with a low credit score. Plus, it’s usually tied to fancy brands and merchants that you wouldn’t normally be able to purchase from. In fact, you don’t even have to pay interest on these schemes given that you pay your instalments on time. 

But, the flip side of it is pushing an already debt-heavy, savings averse generation further in that direction. 

How do companies and brands use BNPL?

Let’s zoom out a little. The companies offering BNPL are not all banks or NBFCs (Non-Banking Financial Institutions). It’s the Apples, the Amazons and the Olas of the world that offer it as a way of increasing their sales. 

And it is a tempting offer, isn’t it? Given the YOLO-ness of most of the demographic has only heightened after COVID - I mean, you can count on a global pandemic to tempt you to live in the moment. Also, the pandemic left a lot of people with less liquid savings, and so most of them would be happy to lean into the BNPL schemes.

One concern here is that these companies are not bound by guidelines that a bank or an NBFC are. This could affect the credit score and financial well being of the users if credit is given out carelessly. If exacerbated further, this could also affect banks, increasing their bad debts and Non-Performing Assets. 

To avoid all that mess, the RBI is currently looking at forming guidelines and regulations in the BNPL market which is expected to hit US$100 billion in gross merchandise value by 2025. 

These could include, restricting the amount that a user can spend on the scheme, pushing brands to be transparent with their fees and giving the customers a risk analysis of choosing BNPL. 

How can you use BNPL to your advantage?

BNPL schemes allow you to (more or less) be your own boss when it comes to payments. And the problem with being your own boss is being your own employee. So, to make sure you make your payments on time, think like your future self. 

Would your future self be happy about the cobwebs in your savings account? No? Then start making a savings plan. Categorise wants and needs are and set a threshold of how much you can spend on all of them. 

If you’re an ‘oh I need to buy this right now or the universe will implode’ kind of a person, try holding off on that impulse, say, by sleeping on it. Come morning, lo and behold, the world would look the same and so would your savings. 

Visualise every payment you make as depleting your precious Monopoly notes. Know how many of these notes you’re holding, when you can afford to buy a city and when you should just pass the dice.

Time to switch to Fi. Smart banking and only that.
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