Customers are at risk of unknowingly incurring debt, says report
Buy Now Pay Later products, which are growing in popularity, have monetary costs similar to those of credit cards, and many of them do not have sufficient safeguards for consumer protection, according to a new research.
“Our findings suggest that customers using BNPL incurs monetary costs comparable to costs of using credit cards, and are susceptible to adverse risks emerging from gaps in customer protection,” said a recent report by Dvara Research.
Authored by Madhu Srinivas and Srikara Prasad, the report said customers incur different costs that materialise before and after defaulting on BNPL repayments, with APR or annual percentage rate, between 0 per cent to 36 per cent.
“…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,” it further said.
The report, titled ‘The Cost of Using BNPL Products’, studied 10 BNPL providers, including Ola Money Postpaid, Amazon Pay Later, PayTM Postpaid, LazyPay, Unicard, FlexMoney, Zestmoney, Slice, Simpl and Kissht.
The findings come at a time when there is increasing popularity of BNPL products, along with greater scrutiny of digital lending practices by the Reserve Bank of India.
The report also highlighted that BNPL providers’ terms and conditions are misaligned with key customer protection regulations, contravening key conduct obligations.
Customers are at risk of unknowingly incurring debt, borrowing credit that is unsuitable for them, and being subject to aggressive debt collection practices, it said.
For instance, 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.
Similarly, some providers, in their T&Cs, do not mention clearly who the financier is, which contravenes the RBI’s circular on loans sourced by banks and NBFCs through digital lending platforms.
Most financiers do not display the names of their digital lending partner, which not only contravenes RBI’s circular but also makes it difficult for BNPL customers to verify if their BNPL provider has in fact tied up with the advertised financier.
Financiers obtained right to reject credit applications without disclosing reason while clauses hidden in some of their fine print was potentially unlawful.
It also highlighted that the use of personal data creates concerns over data protection.
Most of the BNPL providers collected different kinds of personal information (including education information, occupation information and contact information) for on-boarding and verification purposes,” it said, adding that 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.
Significantly, the report also noted that the promise of improving credit access for no-file (without credit history) customers, and thin-file (with minimal credit history) customers may not materialise into better access.
This is because 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, it said.
“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 merchant, and on providers following accurate credit reporting practices,” it said.
Published on July 08, 2022