As consumers move to Pay Later, EMI & Cardless EMI for ecommerce, do we need to do more to educate them before they start using these modes of payments?
As per Razorpay Report (101 days of Lockdown), while UPI and cards were the most preferred payment modes, there was a spike in modes like PayLater (290%), EMI (125%), and Cardless EMI (178%) due to stress in income across households. Neo-Banks or Digital First are on the forefront and facilitating the shift of users from traditional banks with a customer centric and data driven approach.Capital Float is one such NBFC having raised ~$125M in equity (investors include Ribbit Capital, Amazon, SAIF & Sequoia) and $300M in debt to date. Capital Float also has a consumer finance vertical with the Online Checkout Financing product with powers “Amazon Pay Later”. The same is the story with IDFC First Bank which powers “Flipkart Pay Later”.
For “Pay Later Commerce” the marketing message is simple- “Hassle Free Checkout”. With Flipkart Pay Later you have 3 clear features: Credit Line, Instant Buy and Bunch up Payment Options. The process is also very simple- enter your AADHAR, PAN Card Details, Verify with OTP and wait for 30 seconds- you are all done for Flipkart Pay Later now with credit line of up-to INR60,000 in your account. Too good to be true- Correct?
Who is the target customer for such offerings?
Before we get into the details of understating the credit line and how it is funded, let’s look at why ecommerce sites are using “Pay Later” option to drive new consumers, especially, from Tier 2/3/4 to consumer credit. Approximately 45 million Flipkart customers don’t have a traditional credit facility (credit cards mainly), and they use cash on delivery or debit cards while shopping. This offer of extending Rs 6000 credit line targets these customers, who often restrict themselves from shopping more, due to this lack of credit.
What’s the catch- NOTHING, if you have read the finer details?
Firstly, you need to understand that there is a tie-up of each of these marketplaces with a Bank/NBFC in the backend: Flipkart earlier used Kissht and now uses IDFC First Bank. Amazon on the other end has tied up with Capital Float. All these are “Digital First” NBFC/Banks and focus on micro-financing SME’s- who have traditionally found it difficult to raise capital from traditional banks. For borrowers its “one-click loan”. You apply online in minutes, select desired repayment terms and receive funds in your bank accounts in three days. For underwriting loans, they uses a mix of traditional and alternative data. This includes point-of-sale transactions, psychometric evaluation, banking transaction history, tax returns, credit bureaus (CIBIL Scores- you will see more details on this below), and third-party partners such as ecommerce firms. The last point is where players like Flipkart & Amazon come in.
How does the model work?
1. You apply for “Pay Later” option while doing your ecommerce transaction on Flipkart & Amazon. Note- not everyone gets this option. It depends on your transaction history on that platform.
2. Once you click “Apply”- you are requested to share your Aadhar + PAN Details- which then get shared with the NBFC/Bank in the backend- initiating the KYC process.
3. The NBFC/Bank then “Approves” a loan for you for 1 year of INR 60,000 (Usable Limit). Not only that a “New Loan Account” is created against your name with the Bank/NBFC. Nett- your “Pay Later” account has got converted into a loan account and you are now mainstreamed into the credit system. Check your CIBIL records- you will see that you have an approved NBFC/Bank loan for this amount. As per RBI regulations, any entity can only disburse loans up to Rs. 60,000 in a year to the person who registered through Aadhaar-OTP based KYC process. E.g. on Amazon, any successful order placed using Amazon Pay Later, irrespective of whether it got returned, cancelled or rejected by the customer, is counted as the instance of loan disbursal and that order’s value gets counted towards the RBI limit of Rs. 60,000. Nett- your usable limit goes down by the amount outstanding in your account (exactly like a Credit Card.)
4. Just like your Credit Card- if you pay within 40 days (as per your billing cycle), there are “No Charges”, but if you miss you end up paying 5% monthly interest (annualized 60%). There can be additional charges outside this interest. E.g. For Flipkart the penalty for non-payment is Rs 100 for an outstanding of up to Rs 2,000, Rs 200 for an outstanding of Rs 2,001 to Rs 4,000, and Rs 400 for an outstanding of Rs 4,001 or above. Some consumers can take the “Pay Later EMI” option. For this the interest rates (if you miss your EMI payments) are below for Amazon Pay Later (DPD: Days Elapsed Past Due Date):
5. CIBIL Scores & Pay Later: Just like your credit card payments and other loans- defaults on your Pay Later payments will impact your credit score on CIBIL. Most users are first time users and are not aware of the same. They need to be educated on the challenges that easy credit brings and what they need to do to maintain healthy credit scores.
How are consumers reacting to these offers?
While the Razorpay report highlights the growth in this segment post COVID, ecommerce platforms (outside the fine print) have focussed primarily on the marketing messages: “Hassle free, Instant 30 Second Credit”. There has been no consumer education on how these offers work, and how this impacts consumers credit history.
Lot of customers have been surprised to see Capital Float or IDFC First Bank pop-up on their CIBIL scores with a proper account number and credit details- without knowing that they have an account with one of them automatically when they opt for “Pay Later”. With focus on managing the customer experience- ecommerce platforms don’t clearly highlight the partnership angle in the backend e.g. who is “giving the credit” to the customer. One such feedback from IDFC below to a customer escalation on Twitter:
“Thank you for reaching out to us and we are happy to assist you. Flipkart has partnered with IDFC FIRST Bank to provide you a Pay Later facility. You may have recently signed up for Flipkart Pay Later facility on the Flipkart’s Mobile App or website. Confirmation of that is provided in the last step of the sign-up journey,where Flipkart’s association with IDFC FIRST Bank is listed in the form of ‘Powered by IDFC FIRST Bank’. You can de-activate the Flipkart ‘Buy Now Pay Later’ account and the shopping line associated with it by visiting the Flipkart website or the app. To proceed with this, you are requested to kindly settle your balance by clicking on ‘Pay Now’ on the Flipkart Pay Later dashboard and use any of the payment options available. The Pay Later account needs to have a zero-outstanding balance, both billed and unbilled. Once this is done, the account can be deactivated on the website/app itself. Following this, the loan will be cancelled by the Bank.”
Some more escalations on Twitter below:
You can check more on the customer issues online: Consumer Complaints , Twitter
What next?
Recently, RBI pulled up Banks and NBFC for non-transparency in digital loans. Since the bank or NBFC’s names are not disclosed in these digital platforms, the customers don’t get to know who to complaint for grievance redressal, or know the regulatory mechanism available to get relief. This is the first regulatory step in the right direction.
“Right to Consumer Education” is another key pillar of the Consumer Protection Law 2019, which went live this week. This rule focuses on assuring an individual to be an informed consumer throughout their life and which may also prevent him/her from exploitation. This law also covers ecommerce entities and mentions the duties and liabilities of e-commerce entities (Market place and Inventory Model) and sellers on marketplace e-commerce entities.
Hope this will bring more transparency on some of these payment options from a consumer perspective- while helping grow the ecommerce market.
Pankaj Ukey
About the author: The author is an online marketplaces, retail and omni-channel consultant. He was the former Chief Operating Officer at Fawaz Alhokair Group, Saudi Arabia and helped build their Omni-channel Fashion Marketplace. He has 25+ years of experience across FMCG, IT/ITES, Ecommerce & Startups like Nestle, Microsoft, eBay & Flipkart. You can follow him on LinkedIn.
