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Buy now pay later and its financial inclusion scope

Buy now pay later and its financial inclusion scope

US fintech giant Square recently announced an all-stock acquisition of ‘buy now pay later’ (BNPL) leader Afterpay. The deal, at $29 billion, was at a whopping 30% premium to its previous closing price. While the BNPL industry has seen rapid growth in developed markets for the past few years, this acquisition proves that BNPL is the future of payments globally and more so for developing markets such as India.

Launched in 2015 by Afterpay in Australia, BNPL is a way for users to pay later for their e-commerce buys with limited credit checks and a slick payment experience. The product found huge acceptance among millennials, given the growing mistrust of traditional credit products due to their history of lack of transparency in operations and onerous costs of debt. BNPL allowed these young adults to avoid credit and yet get a breather on their cash flow.

Over the years, Afterpay became the market leader in Australia and New Zealand. Similarly, Klarna emerged in Europe and Affirm blossomed in the US even as Afterpay launched in the US, too. All these companies have become market leaders in their respective geographies and have seen strong investor interest reflecting in their valuations.

We, at MobiKwik, believe that the convenience of payments, combined with the benefits of pay later, is an extremely powerful strategy, one that will shape the future of fintech and democratize credit. When the BNPL category creator Afterpay is acquired by the payments behemoth Square, you know that this strategy is not a figment of imagination, but truly a validated model that people are willing to put their money and future behind.

The payments market in the US is booming with large players such as PayPal and Square each participating with their unique models. PayPal is a notable incumbent which launched a pay later product Pay in 4, while others have not really embraced the BNPL opportunity, yet. Square plays on both sides of the payment ecosystem with its large merchant network and a vibrant consumer base on its Cash app. Using Afterpay’s pay later product to connect its consumer base with its merchant base should bring exponential scale and stickiness to the Square-Afterpay platform. Rather than imitating PayPal and developing a product in-house, Square took the acquisition route, acquiring Afterpay.

The fact that Square, with its deep pockets, and talented technology teams felt it was too late to build a product in-house says a lot about the rapid rise of BNPL. I am sure this bold bet on part of Square founder Jack Dorsey and company will play the title role in their plans of market/world dominance and the premium paid to add Afterpay to their arsenal will be totally worth it. The value proposition of Afterpay is such that some analysts have wondered if there will be competitive bids from other players.

Do note that compared with developed markets such as Canada, Japan, US and UK, where credit card penetration is 83%, 68%, 66% and 65%, respectively, India’s credit card penetration remains significantly lower than global peers at 3.5%. This shows the paucity in availability of credit and the inherent opportunity for BNPL to fill the void. Overall, the segment is expected to grow 15x from $3.5 billion in 2021 to $45 billion-$50 billion by 2026.

In the developed markets, BNPL grew because the new generation did not want a credit card with layers of hidden fees from traditional financial institutions. In developing markets such as South Asia and South America, credit is yet to reach the masses and only a select few have access to it. Tech platforms can bring huge efficiency to distribution in these markets. The analogy is simple—there are existing financial highways in place such as US and BNPL will replace many of them. In India, such futuristic highways will be built from scratch using mobile payments and BNPL, rapidly democratizing payments, credit and all of fintech.

BNPL for daily life payments (e-commerce, travel, groceries, bills) is the only way to deliver financial freedom to millions of Indians.

Upasana Taku is co-founder & chief operating officer, MobiKwik.

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