What comes to our mind when we come across the term ‘credit card’? We might start picturing an overworked employee wearing a cap coming in your way while you are taking a stroll in a shopping mall and asking you “Sir, do you use a credit card?”
We know that’s what you would have pictured. The only possibility is a cold call.
Credit card as a status symbol
About 10-15 years ago, people who used credit cards were considered to be wealthy and they used the card more like pocket money. It was almost exclusively a rich man’s thing because only the ones with deep pockets were eligible for credit cards.
But the perception has drastically changed over the years. It is absolutely okay to take credit for everyday use and in fact, banks and financial institutions offer a ton of benefits to credit card users that are too good for the common people to not subscribe.
New player in the town: BNPL
Products in the finance world evolve just like any other product in other segments. The concept behind credit card and buy now, pay later(BNPL) are essentially the same. The fundamental difference comes in the ease of access to credit and its cost.
BNPL as a payment alternative has gained steam thanks to the frenzy shopping habits. There are more options to choose from for the customers but, they can’t have an unlimited source of income to buy all those things. Enter BNPL. The change in consumer behavior with regards to purchasing everyday items has carved a new avenue for a new financial product.
Differences between credit card and BNPL
Like mentioned earlier, the underlying concept of these two are the same – borrow money and pay them off later in small instalments. However, there are some striking differences between the two in terms of:
1. Interest rates
Credit cards are infamous for their 30-40% interest rates. Because these are predominantly offered by banking institutions, they intend to earn an extra penny or two wherever possible. In the case of BNPL, they gained popularity mainly because they offer short term loans at almost negligible rates of interest. Some also provide loans at zero interest.
2. Time taken for approval
All credit providers will require some basic documents like PAN card, bank statement, ID and address proof. But approval for a credit card is granted only after a rigorous background check – credit score, whether the applicant has previously borrowed from any financial institutions, if they have defaulted, how much is pending to be repaid, what was the money borrowed for, etc. Once they are assured that the applicant is capable of repaying the amount in the near future, they will give a go-ahead.
Getting a short term credit from a BNPL service provider is so much easier that the ability to repay isn’t really given much importance. If a user needs funds to purchase a Rs. 5000 worth of shoes, credit will be provided without being asked any questions! One may not even need to have a credit score, let alone a healthy one!
3. Repayment period
Credit card companies provide an option for users to repay the borrowed amounts over a period of 12 months or in cases of bigger amounts, more than 12 months. Repayment periods of BNPL services are restricted to, in most cases, about 6 months irrespective of the value of the transaction. But a few do offer the option to convert those repayments into EMIs of longer tenure.
4. Credit limit
Credit card limits are directly proportional to the applicant’s income and repayment history. It varies from user to user and also different financial institutions will have somewhat different sets of rules for credit limits.
For BNPL, in almost all cases, the credit limit is the same for all users. A standard credit limit.
5. Hidden charges
Credit card companies are notoriously famous for slapping a long list of charges users wouldn’t have even heard of. Of course, users won’t go through each and every T&C, and they pay for it. For example, one day delay in repayment of EMI might draw a penalty of 30% on the principal amount.
On the contrary, BNPL companies market their products as the ones with ‘zero interest and hidden charges loan’, which is TRUE as well.
6. Acceptance as a mode of payment
There will be a minimum transaction value for the use of credit cards. This brings down the number of transactions one can do with their credit card. Moreover, not all merchants accept credit cards because of the high amount of fees they will have to bear for such credit transactions.
BNPL is now widely being adopted even by small merchants thanks to online shopping and the relatively lesser fees for such transactions.
The X-factor of BNPL
It’s the convenience factor that has given the BNPL an edge over credit cards. By becoming another mode of payment during the checkout stage of a transaction, it offers a seamless experience. Why would anyone choose to go through the hassle of entering a couple of OTPs for a single transaction when they have a single tap checkout feature in BNPL?