Thought Leadership

How BNPL Is Driving Financial Inclusion In Developing Countries

Reaching financial inclusion has become one of the most significant tasks for humankind to achieve. The Global Wealth Report 2021 by Credit Suisse displayed that global wealth grew by 7.4% and wealth per adult reached another record high of USD 79,952. Yet, globally, the increase in poverty that occurred in 2020 due to the COVID-19 pandemic has still lingered, and the COVID-induced poor in 2021 continues to be a whopping 97 million people. A new fintech tool has emerged as a shining beacon during the pandemic to tackle the inequalities with the latest BNPL model. That makes low-cost credit available for vast segments of new-to-credit and non-credit carded customers.


What is Buy Now Pay Later (BNPL)?

BNPL is a short-term micro-credit model where customers have to pay little to no interest for online purchases through eCommerce platforms. This allows consumers to purchase and delay the payment by 14–30 days or repay the amount over several instalments in the next few months. The success of BNPL in developing nations can be informally attributed to formal microlending without putting customers through the cumbersome loan processes of traditional banks.


The Rise Of BNPL

During the pandemic-fueled online shopping craze, the buy now pay later industry (BNPL) grew significantly, accounting for $20-25 billion in transactions in the U.S. alone in 2020. It also became an easy alternative for the unbanked population, which faced limited access to credit to finance their purchases. With this radical new payment model’s usage rapidly increasing worldwide, it’s vital to understand how it’s improving the scope of financial inclusion and how alternative data is tracking creditworthiness more accurately.


Using Alternative Data To Determine Credit Worthiness

When it comes to accessing credit, utilizing alternative data can be a secure way to determine an individual’s credit worthiness. In recent years, Fintech companies, including in the BNPL sector, have increased accessibility to credit and lending opportunities for marginal and lower-income groups by finding new ways to evaluate applicants rather than following the tedious model adopted by traditional banks. 


According to Anisha Kothapa, Senior Analyst – Fintech at CB Insights, “BNPL providers use alternative data, AI and machine learning to assess a customer’s credit more quickly and accurately. For example, Affirm uses over 200 consumer data points for risk management, while its seven million existing loans improve its AI algorithm.” She added, “Banks have transaction data, but BNPL providers have a more robust data set like stock keeping data.” This backs the risk with the data provided instead of going through a cumbersome process and yet ending up with defaulters.


Helping Facilitate Individuals With Zero Credit History

Many developing countries have still not adopted the use of credit cards, which remains one of the fastest ways to increase an individual’s credit worthiness. Even in countries like India, credit cards have one of the lowest penetration rates (at 5.55%) among various transactional mediums, including UPI, debit cards, PoS, and internet banking. The low penetration of credit cards in India can be linked to the stringent eligibility criteria adopted by banks in an attempt to avoid defaulters after the daunting economic crisis of 2008. In turn, this has created a vicious loop wherein people cannot access loans due to a lack of credit history.


Sultan Meghji, the first Chief Innovation Officer of the FDIC, while talking about the difficulties faced by the unbanked population, said, “Technology is the best enabler of banking the unbanked. That’s why innovations like BNPL solutions play a significant role in improving financial inclusion. For Gen Z, millennials, and other underbanked populations, the transparency, accessibility, and consistency offered by instalment payments is a gamechanger.”


In Conclusion

With technologies such as BNPL leading the way, the underbanked populations have made significant headway in their financial journey. As Sri Mulyani Indrawati, Minister of Finance of Indonesia, and former head of the World Bank Group, said, “Financial inclusion matters not only because it promotes growth, but because it helps ensure prosperity is widely shared. Access to financial services is critical in lifting people out of poverty, empowering women, and helping governments deliver services to their people.”