While more and more e-commerce and financial technology (fin-tech) companies are joining hands with lenders to provide ‘buy-now-pay-later’ (BNPL) schemes, these products can impose high monetary costs and there are gaps in customer protection safeguards in many of them, says a research report.
A study by Dvara Research says, “… (our) examination suggests that BNPL products can impose high monetary costs that may be comparable to those imposed on credit cards usage – we caveat this by saying that a more thorough examination of actual costs based on customers’ usage of BNPL products and credit cards over time is warranted.”
“We were also able to discover significant misalignment between BNPL providers’ practices and key conduct obligations towards customers. Such misalignment could impose non-monetary costs, which include loss of creditworthiness, personal data-related harms, and misconduct from providers and their agents,” say the authors of the report, Madhu Srinivas and Srikara Prasad.
BNPL products have become one of the popular modes for customers to finance their retail purchases. BNPL products are being positioned as challengers to credit cards that can make credit more accessible to customers at little to no cost.
Dvara Research specifically studied 10 BNPL-providers, including Ola Money Postpaid, Amazon Pay Later, Paytm Postpaid, LazyPay, Unicard, FlexMoney, ZestMoney, slice, Simpl, and Kissht.
It found that customers incur different costs before and after defaulting on BNPL repayments, with an annual percentage rate (APR) between 0% to 36%. “In all the instances where a credit line was sanctioned, the sanctioned limit was much larger than the intended amount of purchase. While this prima facie appears harmless, it could encourage indebtedness especially since, as highlighted previously, the onus of assessing the suitability of credit is placed on the borrower.”
“The problem of indebtedness is further complicated by the fact that all BNPL providers, or their financiers, have a clause in their terms and conditions (T&Cs) allowing them to recall the loan at any time and without assigning any reason. Thus, the borrower with maximum or near-maximum utilisation of credit limit could face a severe liquidity crunch if her loan were to be recalled. These concerns can be partly mitigated by sanctioning a credit line that is the lower of the maximum credit sanctionable to the borrower and the maximum credit limit as requested by the borrower,” Dvara Research says.
Another customer protection concern that emerged from the research was an instance of unilateral cancellation of the credit line by the BNPL-provider, immediate recall of the outstanding amount and non-intimation about it to the borrower.
It says, “Such an action, while consistent with the provider’s T&Cs, raises consumer protection concerns. The immediate recall of the credit line and its non-intimation to the customer puts her at risk of potential default and subsequent impairment of her credit score.”
Further, BNPL-providers’ T&Cs are misaligned with key customer protection regulations, contravening key conduct obligations. “Customers are at a risk of unknowingly incurring debt, borrowing credit that is unsuitable for them, and being subject to aggressive debt collection practices,” it says.
“Barring a couple of rejections, all volunteers successfully registered for the BNPL product and made their purchase. However, specific information about the costs of the BNPL product, like interest rate, processing fee and other charges, was not prominently displayed before the onboarding process. The volunteers were able to get this information on the websites of all the BNPL-providers except FlexMoney.”
According to the report, while most BNPL-providers provided a key facts statement (KFS), some BNPL-providers did not do so. In some cases where KFS was provided, the KFS omitted key details like pricing, customer obligations and penalties.
Further, some providers, like Amazon PayLater, and Ola PostPaid, disclose the name of the bank or the non-banking finance company (NBFC) that will provide credit. “However, some providers, like ZestMoney and Unicard, do not disclose the financier’s identity until the customer’s loan is sanctioned. This can contravene the Reserve Bank of India (RBI)’s circular on loans sourced by banks and NBFCs through digital lending platforms,” it added.
At the same time, Dvara Research says, most financiers or lenders also do not display the names of their partners in digital lending.
Further, financiers have obtained the right to reject credit applications without disclosing a reason. “The financier’s right to reject any credit application without disclosing the reasons for the rejection featured in all the providers’ T&Cs,” the report says.
According to the report, some BNPL-providers, like Amazon Pay Later and Unicard, explicitly place the responsibility of assessing the suitability of the credit line on the customer. “This ‘buyer beware’ approach is problematic and contravenes the Right to Suitability that customers have under the RBI Charter of Customer Rights. Provisions like these can compound customer protection concerns. Evidence from prominent BNPL markets suggests that many customers who avail the BNPL services are rarely aware about entering into a credit contract.”
The report from Dvara Research also highlights how potentially unlawful clauses are hidden in the fine print by BNPL players. It says, “Some clauses in the T&Cs tread a grey line by vacating customer protection safeguards and binding customers with unfair obligations that are potentially illegal. For instance, one clause in Unicard’s T&Cs waived customers’ safeguards under usury and any other laws relating to charging of interest. This clause vacates the protections afforded to customers by usury laws and interest rate related guidelines of RBI.”
“Ideally, unlawful clauses are deemed to be void by default. However, such clauses will have to be challenged before the court or arbitration tribunal to be legally voided. Unfortunately, customers may be ill-equipped to challenge clauses in providers’ T&Cs. Customers may be unable to recognise unlawful clauses. Even if they recognise them, customers may be unable to challenge the clauses due to the monetary and time costs that are associated with doing so,” the report says.
Most BNPL-providers collected different kinds of personal information, including education, occupation and contact information, for on-boarding and verification purposes. However, Dvara Research says the privacy policies that governed the use of personal data were often broad and non-specific, giving providers wide leeway in how they could use personal data.
“For instance, LazyPay had a clause that enabled them to collect and use customers’ personal information without restrictions. This clause unilaterally obtained the customers’ consent to receive promotional offers and other marketing materials,” it says.
While BNPL service-providers place the burden for tracking changes to T&Cs on customers, the report noted unfair charges levied on customers. “We noticed that ZestMoney and Kissht had the option in the general T&Cs to charge an unspecified and non-refundable processing fee even when customers’ loans are cancelled by the provider. Kissht mentions that these charges are applicable even if the loan is not disbursed to the customer.”
“The non-disclosure of fees amount can make it difficult for customers to gauge the costs of borrowing from these providers. Practices like these could also violate the fair practice codes relating to the disclosure of all processing fees and charges,” the report says.
According to Dvara Research, the promise of credit inclusion appears to be weakened by unexplained application rejections and contingent on the sustainability of BNPL business models, sustainability of costs incurred by the merchant, and on providers following accurate credit reporting practices.
The report also highlights that, in the BNPL ecosystem, the promise of improving credit access for customers with no-file (without credit history) and thin-file (with minimal credit history) customers may not materialise into better access. “First, the interest costs currently in force are substantial and will likely rise going forward due to rise in credit costs for the BNPL providers.”
“Second, a shift in business strategy will increase the costs borne by BNPL borrowers. Most of the BNPL products in the market are newly launched offerings. These providers may therefore be looking to acquire more customers to grow and as part of their customer acquisition strategy, could be providing lower rates of interest and other charges. It is likely that the lower costs are a temporary feature and will be rolled back once the market matures. For instance, Unicard, as part of its introductory offer, waived the joining fee of Rs2,499. It is possible that the rates charged could become closer to credit card rates once the BNPL sector becomes more mature,” it says.
In analysing the economics of the BNPL model, Dvara Research says it is important to note that BNPL products perform the functions of both payment and credit; hence, the cost and incentive structures prevailing in the digital payment and credit systems will impact the incidence of costs on customers.
For instance, it says merchants, partner websites and lending service-providers (LSPs), currently, bear at least some of the BNPL providers’ financing cost (or interest charged) on behalf of the customer in some cases, for example, Flipkart and slice. “The costs customers bear could increase in case merchants, or BNPL providers stop bearing the financing cost and pass it on to customers,” it added.
In addition, the costs merchants incur in providing BNPL payment options may affect the credit inclusion promise. Reports from global BNPL market studies suggest that the fee merchants pay BNPL-providers is often twice or thrice the amount merchants pay as merchant discount rate (MDR) on credit or debit card transactions.
The MDR for debit cards in India is capped and is inapplicable to united payment interface (UPI) transactions. However, Dvara Research says, “If these costs get deregulated, and merchants pass on the costs of BNPL transactions to customers to afford the BNPL arrangement, the costs that customers bear when purchasing products and services could increase. The promise of credit inclusion could hold true in the short run but falter in the longer run.”
The report also pointed out that BNPL-providers it studied do not promise access to credit even if the customer has successfully completed the onboarding process. Customers can access and sign-up with different BNPL-providers. However, BNPL-providers make decisions about servicing a customer.
“Our findings suggest that providers make these decisions without justification, denying customers credit or keeping customers’ applications on hold. These instances indicate that currently, BNPL providers appear to be making credit decisions arbitrarily without a discernible approach to selecting the customer segments they service.”
Further, it says, even where customers do get access to credit, there is some uncertainty about whether BNPL-providers report BNPL transactions to credit bureaus and, thus, help them build their credit history.
“This is because BNPL-providers do not categorise their products as loans as they do not charge interest until the customer defaults. This conflicts with the Credit Information Companies Act, 2005, which requires any entity that provides credit to report customers’ repayments to credit bureaus. However, even if providers report to credit bureaus, there are concerns about providers reporting BNPL credit transactions inaccurately. Therefore, customers’ eligibility for obtaining formal credit may not improve in either case,” Dvara Research says.
Source: MoneyLife
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