In India, BNPL has found an additional — and perhaps more productive — application. Self-employed people, whose customers pay mostly in cash, have traditionally found it very hard to prove their creditworthiness to banks. Starting with Unilever in 1888, practically everyone who has tried to sell consumer goods in this large market has relied on distributors to overcome the problem. Apart from supplying goods to small shops and collecting cash from them, these middlemen have historically provided informal liquidity support to the kirana. Since the distributors themselves raise money by mortgaging their warehouses and homes, they ration financing, favoring store owners they know.
To be excluded from this narrow circle of trust has acted as an impossible hurdle for enterprising mom-and-pop outfits that want to expand. They can’t exactly swipe plastic to stock up, not when 85% of credit cards are with salaried individuals.
A part of the gap is being filled by new-age payment firms, which are weaning small stores off cash by encouraging them to use QR codes. Online transactions are growing rapidly. Customers shelled out 1.2 trillion rupees ($16.5 billion) to merchants over popular digital wallets, a threefold jump from a year earlier.
This is a welcome change, though it isn’t enough. The kirana also needs access to interest-free liquidity — just like distributors’ credit — but obtained via a formal channel that isn’t circumscribed by personal trust. Enter BNPL, a product that’s all the rage in consumer finance.
India’s retail industry is on the move. Even small shops can now access large, organized wholesalers such as Walmart, Germany’s Metro AG and Reliance Market, or place bulk orders online with the likes of Jumbotail, a digital grocery marketplace for business buyers. Finance has been the missing link. “As a retailer, I may get better pricing from large cash-and-carry stores or online business-to-business sellers,” says a Merchant, “but if I don’t have cash or a credit card, I’m forced to go back to my area distributor and order only what he has and what he can give me on credit.”
Intermediaries of BNPL have, therefore, used technology to wedge themselves in the middle of the chain, earning a commission from suppliers for paying them a day after delivery, and using that spread to borrow from banks and extend short-term credit to retailers.
For consumers, “buy now, pay later” is often the gateway to purchases they can’t afford, but so far the kirana owners’ approach to the product has been business-driven and sensible. The delinquency rate of BNPL is 0.15%. Clearly, this credit innovation can be more sustainable when it finances livelihoods, and not just lifestyles.