Risks, Regulations & Challenges in Embedded Finance

Risks for Customers

BNPL services are easy to access, but this ease can sometimes lead to problems for users. Here are some key risks customers face:

1. Debt Trap and Over-Borrowing

Because BNPL feels like “paying later,” many people end up spending more than they can afford. They may use multiple BNPL apps at the same time, which can lead to a cycle of debt. Since approvals are often quick and require minimal documentation, it becomes easier to borrow beyond one’s repayment capacity.

2. Impact on Credit Score

Many BNPL providers report repayment behavior to credit bureaus. If a customer misses payments or defaults, it can negatively affect their credit score. A poor credit score can make it difficult to get loans, credit cards, or even rent a house in the future.

3. Hidden Costs and High Penalties

While many BNPL plans are advertised as interest-free, there are often hidden charges. Late payment fees, penalty charges, and processing fees can add up quickly. In some cases, these charges can be very high compared to the original purchase amount.

4. Lack of Financial Literacy

Many young users, especially first-time credit users, do not fully understand the terms and conditions of BNPL. They may not realize that BNPL is a form of credit and that missing payments has serious consequences.

Risks for Merchants

While BNPL can increase sales, merchants also face certain challenges:

• Higher Transaction Costs: Merchants usually pay a higher fee to BNPL providers compared to regular card or UPI payments.
• Chargebacks and Disputes: If a customer disputes a transaction or returns a product, the merchant may still have to bear some cost or face complications in the refund process.
• Dependency on BNPL Providers: If a major BNPL partner faces issues or shuts down, it can affect the merchant’s sales and customer experience.

Risks for BNPL Providers and NBFCs

The companies offering BNPL services also carry significant risks:

Credit Risk

The biggest risk for BNPL providers and their NBFC partners is customers failing to repay. Since many BNPL services offer credit with minimal documentation and quick approvals, the chances of default can be higher compared to traditional lending.

Regulatory Risk

The regulatory environment around digital lending and BNPL in India is still evolving. Any new rules from the Reserve Bank of India (RBI) can impact how these companies operate, their costs, and their profitability.

Reputation Risk

If BNPL providers are seen as encouraging irresponsible borrowing or using aggressive recovery practices, it can damage their brand image and lead to loss of customer trust.

Regulatory Framework in India

The Reserve Bank of India has been closely monitoring the growth of BNPL and digital lending. Some important regulatory points include:

• BNPL providers that offer credit must partner with regulated entities like banks or NBFCs.
• Digital lending guidelines require proper disclosure of terms, interest rates, and fees to customers.
• Recovery practices must follow fair and transparent methods. Harassing customers for repayment is not allowed.
• Data privacy and security of customer information must be maintained as per regulations.

The RBI continues to review and update guidelines for digital lending and BNPL to protect consumers while allowing innovation in the sector.

Key Challenges in Embedded Finance & BNPL

Despite its rapid growth, the Embedded Finance and BNPL industry in India faces several challenges:

• High Customer Acquisition Cost: Competing for users across multiple apps is expensive.
• Credit Assessment Difficulties: Assessing creditworthiness of new-to-credit customers accurately remains a challenge.
• Profitability Pressure: Many BNPL companies are still struggling to become consistently profitable due to high defaults and operational costs.
• Customer Education: A large section of users still lacks proper understanding of how credit and repayment work.
• Competition: The market is crowded with many players, leading to intense competition on fees and offers.