Buy Now Pay Later
Also called: BNPL · Topic: Payment Systems and Digital Finance · NCERT: Beyond NCERT
Meaning
Buy Now Pay Later (BNPL) is short-term credit (a small loan) offered at checkout, when you buy something. You take the product now and pay for it later in instalments (fixed part-payments). These are often interest-free if you repay on time, and the lender earns mainly from late fees and penalties.
It matters because it brings credit to young and first-time buyers with no credit history. It also carries risks: hidden charges, many small loans piling up, and credit products slipping outside RBI's rules. For these reasons the RBI has tightened the rules on it several times.
Explanation
How it works
- Three parties are involved:
- the buyer, who wants to pay later
- the merchant, the online or offline shop
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the lender, who pays the merchant now and collects from the buyer later
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The flow of money:
- The buyer picks "Pay Later" at checkout.
- The lender pays the merchant, and the buyer now owes the lender.
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The buyer repays in instalments over a short period.
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How the lender earns:
- The "interest-free" label only holds if the buyer repays on time.
- Missed payments bring late fees and penalties, and these are a key source of income.
- Merchants may also pay the lender, because easy credit helps them sell more.
The fintech–lender partnership
- A BNPL app is often run by a fintech (a technology company that offers financial services).
- Under RBI rules, only a Regulated Entity (RE) can actually lend. An RE is a bank or NBFC licensed by the RBI. (An NBFC, or Non-Banking Financial Company, lends money but cannot take ordinary current-account deposits like a bank.)
- The fintech works as a Lending Service Provider (LSP), a partner that finds customers, collects documents or recovers dues for the RE.
- Default Loss Guarantee (DLG):
- A DLG is a promise by the fintech to cover the lender's losses up to a limit.
- It is capped at "5 per cent of the total amount disbursed out of that loan portfolio" [1].
- For example, if an NBFC lends ₹100 crore through a fintech, the fintech can cover at most ₹5 crore of losses. The NBFC carries the rest, so it still has a reason to check borrowers carefully.
Hidden cost: why "interest-free" can mislead
- The real cost is shown by the APR (Annual Percentage Rate), the all-in yearly cost of a loan, including fees.
- Worked example (from RBI's digital-lending rules):
- An app lends ₹10,000 for 30 days. It charges a ₹200 processing fee and ₹150 interest.
- Total cost = ₹350, which is 3.5% for one month.
- APR ≈ 3.5% × (365 ÷ 30) ≈ 42.6% a year.
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The advert may say "only 1.5% interest", but the Key Fact Statement (KFS) must show about 42.6%.
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What pushes BNPL use up or down:
- Up: more online shopping, UPI-driven digital habits, and buyers with no credit card.
- Down: stricter RBI rules (such as the 2022 PPI curb) and credit-bureau reporting, which makes borrowers and lenders more careful.
In India
- Regulator: the RBI, through its rules on digital lending and on payment instruments.
- 2022 PPI curb:
- A PPI (Prepaid Payment Instrument) is a wallet or prepaid card that you load with money in advance.
- Some fintechs were loading loan money into these wallets. This created a card-less credit product that sat outside the rules for credit cards.
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In 2022 the RBI barred loading PPIs from credit lines. This hit card-less BNPL models that ran through wallets.
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Digital Lending Guidelines (September 2022):
- These came from the RBI's Working Group on Digital Lending (2021).
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They were later combined into the Reserve Bank of India (Digital Lending) Directions, 2025, issued on 8 May 2025 [1].
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Rules that apply to BNPL given through a regulated lender:
- Credit bureau reporting. Lending on merchant platforms that involves short-term credit or deferred payments must be reported to Credit Information Companies (CICs) by the regulated lender [1]. CICs are credit bureaus such as CIBIL. So BNPL loans now show up in a person's credit score.
- Direct money flow. Loans are paid only into the borrower's own bank account. Repayments go directly to the lender's account, "without any pass-through account" [1].
- KFS with APR. The borrower must get a Key Fact Statement showing the all-inclusive APR before signing, in line with RBI's KFS circular of 15 April 2024 [1].
- Cooling-off period. The borrower can exit the loan without penalty within at least one day, paying only the principal plus the proportionate APR [1].
- Grievances. If a complaint is not resolved within 30 days, the borrower can go to RBI's Complaint Management System or the RBI Ombudsman [1].
- Data. Data may be collected only with prior and explicit consent and must be stored on servers in India [1].
- App list. REs had to report their digital lending apps on RBI's CIMS portal by 15 June 2025. RBI publishes this list but does not verify the data [1].
- Loan-offer display. From 1 November 2025, an app that shows loan offers from several lenders must show them in an "unbiased, objective" way, without dark patterns (tricky designs that push users towards a choice) [1].
Don't confuse with
- Credit card: BNPL is usually card-less credit given at checkout. The 2022 PPI curb targeted wallet-based BNPL because it worked like a credit card while staying outside credit-card rules.
- Prepaid Payment Instrument (PPI): a PPI holds your own money, loaded in advance. BNPL is borrowed money. Since 2022, PPIs cannot be loaded from credit lines.
- Peer-to-peer (P2P) lending: P2P platforms (regulated as NBFC-P2Ps since 2017) connect individual lenders directly with borrowers [2]. In BNPL, the lender is a regulated bank or NBFC, often working through a fintech partner.
- Default Loss Guarantee (DLG) vs. interest-free offer: a DLG is the fintech's promise to the lender (capped at 5%) [1]. "Interest-free" is a promise to the buyer, and it holds only if the buyer repays on time.
Prelims Hooks
- BNPL = short-term credit at checkout, repaid in instalments, often interest-free if repaid on time. The lender's income comes largely from late fees and penalties.
- 2022: RBI barred loading PPIs from credit lines, which hit wallet-based card-less BNPL.
- Under the Digital Lending Directions, 2025 (8 May 2025), BNPL-type short-term or deferred-payment credit on merchant platforms must be reported to CICs [1].
- Trap: "interest-free" does not mean cost-free. The KFS must show the all-inclusive APR [1].
- DLG cap = 5% of the amount disbursed in the portfolio. It may be given only as a cash deposit, a fixed deposit with lien, or a bank guarantee [1].
- Trap: only a Regulated Entity (bank or NBFC) can lend. The BNPL app or fintech is usually just the LSP.
Mains Points
- Financial inclusion vs. debt trap:
- BNPL gives credit to people with no credit history, using the data trail left by digital payments.
- But easy "interest-free" credit can lead young and poor buyers into many small loans, where late fees add up quickly.
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RBI's answer is to regulate the activity, not the technology: KFS with APR, a cooling-off period, CIC reporting and direct money flow.
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Closing regulatory arbitrage (using gaps between rules):
- Wallet-based BNPL worked like a credit card without following credit-card rules.
- The 2022 PPI curb and the 5% DLG cap follow one idea: whoever carries the lending risk must be a regulated entity with enough capital.
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This stops fintechs from becoming "shadow banks" (lenders that act like banks without bank-level rules) that build up hidden risk in the financial system.
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Where the rules stop (GS-II link):
- RBI's rules bind only regulated lenders. Unregistered "pay later" or loan apps need a whole-of-government response: MeitY blocking of apps, police action, app-store checks, the Digital Personal Data Protection Act, 2023 and financial literacy.