Reimagining Buy Now, Pay Later in India: A Blueprint for a Sustainable, Inclusive, and Regulated Future

Executive Summary

The Buy Now, Pay Later (BNPL) industry in India stands at a critical inflection point. Its initial, meteoric rise was fueled by a potent combination of cultural familiarity, technological innovation, and a significant gap in the formal credit market. However, this period of unrestrained growth, characterized by regulatory arbitrage and opaque risk-sharing models, has been decisively concluded by the Reserve Bank of India's (RBI) Digital Lending Guidelines (DLG). This whitepaper posits that the RBI's intervention, while profoundly disruptive to legacy business models, was not a death knell but a necessary catalyst for evolution. It has created a mandate for the industry to mature beyond its initial form.

The future of BNPL in India lies not in attempts to circumvent regulation but in a fundamental reimagination of its purpose and architecture. This report architects a blueprint for "BNPL 2.0," a sustainable and compliant model designed for the new regulatory paradigm. Drawing lessons from the global regulatory reckoning in markets like the United States, the European Union, and Australia, this framework demonstrates that a path to profitability and scale exists within the confines of responsible lending.

The proposed BNPL 2.0 model is built on three core pillars: Technology-Driven Responsible Lending, leveraging Artificial Intelligence (AI) and alternative credit scoring to underwrite the new-to-credit segment responsibly; Deep-Tier Financial Inclusion, forging strategic partnerships and deploying vernacular technologies to reach the truly underbanked; and an Empowered Customer Journey, embedding financial literacy and transparent controls directly into the user experience.

This reimagined framework transforms BNPL from a mere transactional convenience into a powerful engine for financial inclusion. For the Indian consumer, it promises not just the ability to defer payments but a safe, transparent, and educational on-ramp to the formal credit ecosystem. For the industry, it offers a blueprint for building businesses that are not only commercially viable but also aligned with the national objective of creating a resilient and inclusive digital economy. The era of the regulatory conundrum is over; the dawn of a new, more purposeful era for credit in India has begun.

Section 1: The Genesis and Ascent of Buy Now, Pay Later in India

1.1 Defining BNPL: More Than Just an Installment Plan

Buy Now, Pay Later (BNPL) is a form of short-term, point-of-sale (POS) financing that allows consumers to acquire goods and services immediately while deferring the full payment to a future date.At its core, the mechanism involves a three-party transaction: a consumer makes a purchase from a merchant, and a third-party BNPL provider pays the merchant the full transaction amount upfront, typically minus a merchant discount rate (MDR) or commission. The consumer then repays the BNPL provider over a predetermined period through a series of installments.This structure effectively transfers the credit and fraud risk from the merchant to the BNPL platform. 

This model distinguishes itself fundamentally from traditional credit instruments. Unlike credit cards, which offer a revolving line of credit with a requirement to pay a minimum amount due each month, BNPL typically involves a fixed repayment schedule with equal installments over a set period, often weeks or months.The approval process is another key differentiator. While credit cards and personal loans involve a "hard" credit check and a lengthy application process, BNPL providers often use a "soft" credit check or proprietary algorithms, allowing for near-instantaneous approval at the checkout, a feature that significantly reduces friction in the purchase journey. 

BNPL offerings generally fall into two categories. The first is the short-term, interest-free model, where the purchase amount is split into a few installments (e.g., "Pay-in-Four") with no interest charged to the consumer if payments are made on time.The provider's revenue in this model is derived primarily from merchant fees and late payment penalties from consumers.The second category involves longer-term financing for higher-ticket items, structured as no-cost or low-cost Equated Monthly Installments (EMIs), where the interest cost is often subsidized by the merchant (a practice known as subvention) or charged to the consumer at a specified rate. 

1.2 From 'Udhar Khata' to Digital Credit: The Cultural and Technological Precursors

The remarkable speed of BNPL's adoption in India cannot be understood merely through a technological or financial lens; it is deeply rooted in cultural precedent. For generations, the backbone of local commerce has been the udhar khata—a paper-based credit ledger maintained by neighborhood kirana (mom-and-pop) stores.This system allowed trusted customers to buy provisions on credit and settle the account later, creating a localized, trust-based ecosystem of deferred payments.The udhar khata normalized the concept of buying now and paying later within Indian communities, establishing a strong cultural familiarity with informal, short-term credit.

The recent digital revolution provided the tools to formalize this tradition. The evolution from physical notebooks to digital ledger applications like KhataBook, which allow small merchants to track receivables and send automated payment reminders via SMS and WhatsApp, marked a critical transition.These apps digitized the udhar relationship, priming millions of small business owners and their customers for a more structured, technology-enabled credit system.

It was into this fertile ground—a culture accustomed to deferred payments and a population rapidly embracing digital tools—that modern BNPL was introduced. The confluence of widespread smartphone penetration, the world's most affordable mobile data, and a booming e-commerce sector created the perfect ecosystem for the "new avatar" of the udhar khata.BNPL platforms offered a technologically sophisticated version of a familiar concept: instant, low-friction credit at the point of need. This cultural resonance significantly lowered the psychological barrier to entry for a vast segment of the population that was either wary of or excluded from the formal banking system, providing a powerful tailwind for BNPL's initial surge.  

1.3 The First Wave (Pre-Regulation): Market Emergence and Business Models

The first wave of dedicated BNPL fintech players, including names like LazyPay, Simpl, ZestMoney, and Slice, began to emerge in the Indian market around 2016.They tapped into the latent demand for accessible credit, leading to a period of explosive growth. The market's Gross Merchandise Value (GMV), representing the total value of loans disbursed, grew at a staggering Compound Annual Growth Rate (CAGR) of approximately 321% between fiscal years 2019 and 2021.Market size estimates for 2023 and 2024 varied across reports but consistently pointed to a multi-billion-dollar industry on a steep upward trajectory. 

During this pre-regulation era, a variety of business models flourished, often in a regulatory grey area. These can be categorized along several strategic axes:  

• Purpose-led Models:
  • Convenience Model: This model, exemplified by "Pay-in-15/30" or "Pay-in-3" offerings, focused on small-ticket, high-frequency purchases. It served as a powerful customer acquisition tool, particularly for New-to-Credit (NTC) users. Revenue was primarily generated from merchant commissions (MDR) and, significantly, from late fees charged to consumers who missed repayment deadlines. 
  • Credit Model: This model targeted larger-ticket purchases through No-Cost EMIs or interest-bearing installment plans. It was geared towards profitability, with revenue coming from merchant subvention (merchants paying a fee to offer 0% EMI) and interest income from consumers. This model typically required more robust underwriting and was aimed at customers with some existing credit history.Many players evolved to a hybrid approach, using the convenience model as a funnel to acquire users and then cross-selling them profitable credit products.  
• Ecosystem-led Models:
  • Closed-Loop: These providers, such as ZestMoney and Simpl, integrated directly with merchant checkout systems. This created a captive ecosystem with high customer stickiness but was more difficult to scale, as it required individual integration with each merchant. 
  • Open-Loop: Players like Slice and LazyPay (with its LazyCard) leveraged existing payment rails like Visa or RuPay. By issuing a physical or virtual card, they allowed users to access their BNPL credit line at any merchant that accepted card payments, enabling rapid scalability and wider acceptance. 
• The Critical Partnership Model: The engine of this rapid, capital-light expansion was a strategic partnership model between fintechs and regulated entities (REs) like banks and Non-Banking Financial Companies (NBFCs).In this arrangement, the fintech provided the technology platform, customer interface, and user acquisition engine. The RE, in turn, provided the capital and underwrote the loan, especially for larger EMI-based transactions.This symbiosis allowed fintechs to operate and scale quickly without needing to hold an NBFC license or maintain the associated regulatory capital themselves, placing them in a favorable but precarious regulatory grey area.This structure, however, blurred the lines of accountability for credit risk, a vulnerability that would eventually draw the focused attention of the RBI.  

The initial success of BNPL in India was therefore not merely a story of product-market fit. It was a unique alignment of cultural precedent, technological readiness, and a business model that skillfully navigated a gap in the regulatory framework. The digital udhar concept explained why consumers and merchants embraced it, while the capital-light partnership model explained how fintechs scaled it so rapidly. This very combination, however, created a systemic fragility that made a regulatory reckoning almost inevitable. The reliance on opaque risk-sharing agreements with REs, often involving informal First Loss Default Guarantees (FLDGs), created a systemic vulnerability. The regulator would eventually need to intervene not just to protect consumers, but to re-establish clear lines of credit risk and accountability within the financial system itself.

Table 1: BNPL vs. Traditional Credit (Credit Cards & Personal Loans) in India

Section 2: The Indian Consumer and the BNPL Proposition

2.1 Decoding the BNPL User: A Demographic and Psychographic Profile

A detailed analysis of the Indian BNPL user reveals a distinct and consistent profile, heavily skewed towards the nation's burgeoning youth demographic. This user base is not a monolith but shares several key characteristics that explain the product's appeal and its specific role in the credit landscape.

• Age and Generational Cohort: The primary adopters of BNPL are overwhelmingly Millennials (aged 26-43) and Generation Z (aged 18-25).Data indicates that the 26-35 age group is the most significant, accounting for approximately 40% of the total Gross Merchandise Value (GMV) in the market.Collectively, consumers aged 18-34 constitute around 60% of all BNPL users in India.In 2024, Gen Z alone commanded a formidable 39.7% share of the user base, reflecting their mobile-first habits and a general mistrust of traditional revolving credit products. 
• Income and Credit Profile: A defining characteristic of the typical BNPL user is their relationship with the formal credit system. They are often "New-to-Credit" (NTC) or possess a "thin file," meaning they have little to no formal credit history, which renders them ineligible for conventional credit cards or loans.This segment often falls within the low-to-middle income brackets, seeking accessible credit solutions that do not require stringent income proofs or high credit scores. 
• Geographic Distribution: While the highest transaction volumes are concentrated in metropolitan and Tier-1 cities like Delhi-NCR and Mumbai, which benefit from high population density and economic activity, the most rapid growth is occurring elsewhere.Tier-2 and Tier-3 cities are the new frontiers for BNPL adoption. These regions are now home to 72% of India's internet users, and the proliferation of vernacular apps and QR-code payments at local stores is fueling explosive growth, signaling a deep-seated demand beyond the major urban centers. 
• Psychographic Traits: The Indian BNPL user is digitally native, comfortable with mobile apps, and values convenience, speed, and flexibility in their financial interactions.Their purchasing decisions are often influenced by a desire for instant gratification and the aspiration to access products and lifestyles that may be just beyond their immediate financial reach. However, this digital fluency is not always matched by high financial literacy, making them more susceptible to the psychological allure of splitting payments and potentially underestimating the risks of accumulating debt. 

2.2 Drivers of Adoption: Convenience, Aspiration, and the Credit Gap

The rapid proliferation of BNPL in India is propelled by a confluence of structural, economic, and psychological factors. While convenience is often cited, a deeper analysis reveals more fundamental drivers.

• The Structural Credit Gap: This is the single most important driver of BNPL adoption in India. Formal credit card penetration remains astonishingly low, accessible to only about 3-5% of the population.This leaves an estimated 93% of Indians without access to a simple, revolving line of credit.BNPL stepped directly into this massive void. For the vast majority of its user base, the choice was never "BNPL versus a credit card," but rather "BNPL versus no credit at all." This context reframes BNPL from a mere payment alternative to a crucial, and often the first, point of access to formal credit for millions.  
• Frictionless Convenience and Superior User Experience: The seamless integration of BNPL into the e-commerce checkout process is a powerful catalyst. The promise of instant approval with minimal documentation and a one-click payment experience stands in stark contrast to the cumbersome application processes of traditional lenders.This frictionless journey is a significant competitive advantage, proven to reduce cart abandonment rates for merchants by as much as 51% and increase conversion rates. 
• Enabling Aspirational Purchases: BNPL acts as a powerful enabler of consumer aspirations. It democratizes access to higher-value goods such as smartphones, consumer electronics, and fashion, as well as services like travel and online education, which might otherwise be unaffordable in a single upfront payment.By breaking down large costs into manageable installments, BNPL effectively increases the immediate purchasing power of consumers, leading to a demonstrable increase in the Average Order Value (AOV) for merchants. 
• The "Zero-Cost" Psychological Appeal: The marketing of BNPL as an "interest-free" or "zero-cost EMI" product is a major psychological draw for consumers.The proposition of obtaining credit without incurring interest charges is highly attractive, particularly for budget-conscious users. This perception of "free money" often overshadows the potential for punitive late fees, making the initial decision to use BNPL an easy one.  

2.3 The Double-Edged Sword: Perceived Benefits vs. Hidden Risks

From the consumer's perspective, the BNPL proposition appears overwhelmingly positive, offering a blend of accessibility and control. However, these benefits are accompanied by significant, often underestimated, risks that have been a major source of regulatory concern.

• Consumer-Perceived Benefits: The primary advantages perceived by users are clear. BNPL enhances affordability, making desired products immediately attainable.It facilitates better budget management by structuring repayments into predictable, fixed installments, unlike the open-ended nature of credit card debt.Crucially, it provides access to credit for individuals with low or no credit scores, who are locked out of the traditional financial system.Finally, the process is seen as simple and transparent, with a clear repayment schedule laid out at the time of purchase. 
• The Hidden Risks and Financial Pitfalls:
  • Debt Accumulation and Overspending: The very ease and convenience of BNPL can foster a cycle of impulsive buying and debt accumulation. The psychological trick of reframing a large purchase into small, manageable installments can lead consumers to overextend themselves. Studies have shown that 60% of Indian BNPL users admitted to spending more than they could actually afford.The ability to easily access multiple BNPL services simultaneously allows users to "stack" loans, creating a complex and often unmanageable web of debt that is difficult to track. 
  • Punitive Late Fees: The "interest-free" claim is conditional. A single missed payment can trigger substantial late fees, which, when annualized, can equate to interest rates as high as 30-40%, far exceeding those of many traditional credit products.In the pre-regulation era, late fees were a significant revenue stream for many BNPL providers, indicating a business model that, in part, relied on customer defaults. 
  • Negative Impact on Credit Scores: A common misconception among new users is that BNPL, being separate from banks, does not affect their credit score. This is incorrect. Most BNPL providers, especially for EMI-based products, report repayment behavior to credit bureaus. Failure to make timely payments can severely damage a user's credit score, jeopardizing their future ability to secure loans for major life events like education, a vehicle, or a home. 
  • Lack of Consumer Protections (Pre-DLG): Before the RBI's intervention, the BNPL space operated in a regulatory void. Consumers had fewer and less clearly defined protections regarding dispute resolution, chargebacks for faulty goods, and refunds compared to the robust framework governing credit cards. 

The outsized role of BNPL as a primary credit onboarding tool for millions of Indians elevates the stakes of its design. A poorly structured, predatory system risks creating a generation of consumers burdened with damaged credit profiles and poor financial habits. Conversely, a responsibly designed, transparent, and educational BNPL framework has the potential to be a powerful engine for building positive credit histories and fostering widespread financial literacy. This transforms the challenge of reimagining BNPL from a simple business strategy into a matter of profound importance for the nation's long-term financial health.

Section 3: A Global Regulatory Reckoning: Lessons for India

The regulatory challenges posed by the rapid growth of BNPL are not unique to India. Financial authorities across the globe are grappling with how to balance the innovation and financial inclusion potential of BNPL with the urgent need for consumer protection and financial stability. An analysis of the approaches taken by major economies like the United States, the European Union, and Australia provides a crucial external context for understanding the RBI's actions and for charting a sustainable future course. These international responses reveal a spectrum of regulatory philosophies, each with distinct trade-offs.

3.1 The United States (CFPB): BNPL as a "Credit Card"

The United States' approach, led by the Consumer Financial Protection Bureau (CFPB), has been characterized by an attempt to fit BNPL into the existing regulatory architecture. The core strategy has been to classify BNPL products as "credit cards" under the Truth in Lending Act (TILA) and its implementing rule, Regulation Z. 

• The 2024 Interpretive Rule: In May 2024, the CFPB issued a pivotal interpretive rule asserting that BNPL lenders who issue digital user accounts for accessing credit are, in fact, "card issuers." Consequently, the BNPL products accessed through these accounts are considered "credit cards" under Regulation Z.This interpretation was based on the premise that a digital user account used "from time to time" to access credit functions similarly to a traditional credit card. 
• Key Implications for Providers: This classification is not merely semantic; it triggers a suite of mandatory consumer protections that have long been standard for credit cards. BNPL providers in the U.S. were thus expected to:
  1. Investigate consumer disputes and pause payment requirements during the investigation.
  2. Provide refunds to consumers for returned products or cancelled services by crediting their BNPL loan balance.
  3. Issue clear, periodic billing statements outlining fees and payment schedules. 
• Political Volatility and Regulatory Uncertainty: A crucial lesson from the U.S. experience is the impact of political shifts on regulation. Following a change in administration, the CFPB announced in May 2025 that it would deprioritize enforcement of the interpretive rule and was contemplating its rescission.This abrupt reversal highlights the inherent volatility of a regulatory strategy based on interpretation rather than new legislation. It serves as a cautionary tale for the industry about the risks of building business models on regulatory ambiguity.  

The CFPB's initial drive to regulate was fueled by clear evidence of consumer risk, including rapid debt accumulation, the practice of "loan stacking" (taking out loans from multiple providers simultaneously), and a significant gap in consumer protections compared to other credit products. 

3.2 The European Union (CCD2): A Framework for Transparency and Responsible Lending

The European Union has taken a more prescriptive and harmonized approach through its revised Consumer Credit Directive (CCD2). Instead of reinterpreting old laws, the EU has explicitly expanded the definition of "credit" to encompass most BNPL products, creating a new, comprehensive set of rules for the entire bloc. 

• Core Provisions of CCD2:
  • Mandatory and Robust Creditworthiness Assessments: The directive moves beyond the light-touch "soft checks" common in the industry. It mandates that BNPL providers conduct a thorough assessment of a consumer's ability to repay the loan before granting credit. This requires providers to gather and verify relevant information on the consumer's financial situation, including income and existing debts, to prevent irresponsible lending and over-indebtedness. 
  • Fee Caps and APR Regulation: A significant change is the requirement for all fees, including late payment penalties, to comply with the national Annual Percentage Rate (APR) caps of each EU member state.These caps vary significantly across the EU (e.g., 15% in the Netherlands), directly impacting the profitability of business models that rely heavily on late fees and forcing a country-specific pricing strategy. 
  • Enhanced Transparency and Advertising Rules: CCD2 imposes strict rules on how BNPL products are marketed. All advertising must be fair, clear, and not misleading. It mandates the inclusion of a standardized warning, such as "Borrowing money costs money," to ensure consumers are aware of the risks. Furthermore, detailed pre-contractual information must be provided to the consumer in a clear format. 

The full implementation of CCD2 is expected by the end of 2026, providing a transitional period for the industry to adapt its business models, technology, and compliance frameworks to this new, more stringent reality. 

3.3 Australia (ASIC): Licensing and the Scalpel of Modified Responsible Lending

Australia has pursued a structural adaptation, creating a bespoke regulatory framework for BNPL that recognizes its unique characteristics while bringing it firmly under the oversight of the Australian Securities and Investments Commission (ASIC). The approach amends the National Credit Act to include BNPL, but with tailored obligations. 

• Core Provisions of the New Regime:
  • Mandatory Australian Credit Licence (ACL): As of June 10, 2025, all BNPL providers are required to hold an Australian Credit Licence. This is a significant structural change that subjects them to the full suite of licensing obligations, including compliance, reporting, and a requirement to be a member of the Australian Financial Complaints Authority (AFCA), the external dispute resolution body. 
  • Modified Responsible Lending Obligations (RLOs): This is the most nuanced element of the Australian model. The law acknowledges that applying the full, onerous RLOs from traditional credit could stifle the low-friction nature of BNPL. Therefore, it creates a new category of "Low-Cost Credit Contracts" (LCCCs) and allows providers to elect to comply with a modified, less burdensome set of responsible lending obligations.This includes a rebuttable presumption that a BNPL contract with a credit limit of $2,000 or less is suitable for the consumer, streamlining the assessment process for smaller-ticket items. 
  • Fee Caps: The Australian framework also introduces caps on the total amount of fees and charges that can be levied on a consumer over a 12-month period, protecting consumers from excessive costs. 

This comparative analysis reveals that while the global direction of travel is unequivocally towards regulating BNPL as a form of credit, the strategic approaches differ. The U.S. model of interpretation is fast but legally and politically fragile. The EU's prescriptive model offers clarity but can be rigid. Australia's model of structural adaptation is perhaps the most flexible, creating a new regulatory category to fit the product. This global spectrum of choices provides a valuable lens through which to assess the RBI's own unique approach. The clear, overarching takeaway is that the era of regulatory arbitrage for BNPL is definitively over. Any viable future for the industry, in India or elsewhere, must be built not on finding loopholes, but on a foundation of robust compliance and responsible innovation.

Table 2: Comparative Analysis of Global BNPL Regulatory Frameworks

Section 4: The RBI's Paradigm Shift: Navigating India's New Digital Lending Landscape

While global regulators were deliberating, the Reserve Bank of India (RBI) acted decisively, introducing a comprehensive framework that fundamentally rewired the country's digital lending ecosystem. The RBI's Digital Lending Guidelines (DLG), issued through a series of circulars and consolidated into the Digital Lending Directions, 2025, were not an incremental adjustment but a paradigm shift.They targeted the structural vulnerabilities of the pre-existing BNPL model, prioritizing financial stability and clear regulatory accountability above all else.  

4.1 Anatomy of the Digital Lending Guidelines: Key Provisions and Impact

The DLG framework established a clear set of rules governing all digital lending activities by Regulated Entities (REs), such as banks and NBFCs, and their Lending Service Provider (LSP) partners.The most critical provisions include:  

• Direct Fund Flow Mandate: This is the cornerstone of the guidelines. The RBI mandated that all loan disbursals must flow directly from the bank account of the RE to the bank account of the borrower. Similarly, all loan repayments must be made directly from the borrower's bank account to the RE's account. The use of any third-party pass-through accounts or wallets, including those managed by LSPs or fintech partners, was strictly prohibited.This rule was designed to create an unalterable audit trail and prevent the commingling of funds.  
• Clarification of LSP Role: The guidelines explicitly define LSPs as "agents" of the REs. Crucially, the REs are held fully and solely responsible for all actions and omissions of their LSP partners.This provision pierces the veil of separation that previously existed, making banks and NBFCs directly accountable for the entire customer journey, from sourcing to recovery.  
• Enhanced Transparency and Disclosure: The RBI introduced a mandate for a standardized Key Fact Statement (KFS) to be provided to the borrower before the execution of the loan contract. The KFS must contain all essential information in a simple, readable format, including the all-inclusive Annual Percentage Rate (APR), the loan tenure, the repayment schedule, details of the recovery process, and contact information for a designated Grievance Redressal Officer.The guidelines also mandate a "cooling-off" or "look-up" period, during which a borrower can exit the loan by repaying the principal and the proportionate APR without penalty. 
• Strict Data Governance and Privacy Rules: Addressing widespread concerns about data misuse, the DLG imposed stringent regulations on data collection and storage. Data collection by digital lending apps must be need-based and require explicit, auditable consent from the borrower. The guidelines explicitly prohibit access to a borrower's mobile phone resources, such as contact lists, call logs, or media files. Furthermore, all data collected must be stored on servers located within India. 
• Formalization of Default Loss Guarantee (DLG): The framework brought structure to the previously informal practice of First Loss Default Guarantees (FLDGs). It capped the total DLG cover on any outstanding portfolio at 5% of the loan amount disbursed and stipulated that such arrangements must be backed by a formal, legally enforceable contract. 

4.2 The End of an Era: How RBI Disrupted Legacy BNPL Models

The RBI's most surgical and disruptive intervention came in its June 2022 clarification, which stated that Prepaid Payment Instruments (PPIs), such as digital wallets and prepaid cards, could not be loaded using credit lines.This single directive, combined with the direct fund flow mandate, effectively dismantled the core operating model of many of the most prominent and fast-growing BNPL players in India.  

Companies like Slice and Uni had built their entire value proposition on an open-loop, card-based BNPL model. They partnered with an RE to issue a credit line, which was then loaded onto a PPI card. This card could be used at any merchant that accepted card payments, giving the user a seamless, credit-card-like experience without needing a traditional credit card.This model was their unique selling proposition (USP), offering unparalleled convenience and acceptance.  

The RBI's clarification rendered this model non-compliant overnight. It forced these companies into a "major business model overhaul," compelling them to halt operations and pivot away from the very structure that had fueled their growth.The move was a clear signal that the RBI viewed the practice of using PPIs to mask credit disbursement as a form of regulatory arbitrage that bypassed the rules governing both credit and payments. This was a fundamental shift from a flexible, credit-line-based system to a more constrained and regulated loan-based system, diminishing the product's original, frictionless appeal. 

4.3 The Unspoken Challenge: Profitability, Credit Risk, and Sustainability

The RBI's regulatory overhaul has amplified the fundamental business challenges that have always loomed over the BNPL industry.

• The Profitability Conundrum: Even before the DLG, the path to profitability for BNPL was elusive. The business model was characterized by a "growth-at-all-costs" mentality, with high upfront costs for marketing and customer acquisition.Revenue was heavily dependent on high merchant fees (ranging from 2% to 8%) and, more troublingly, on late fees from consumers, suggesting a reliance on customer defaults.The new regulations add significant pressure to these already thin margins. Increased compliance costs, the need for investment in RegTech, and the potential for a slower, more deliberate user onboarding process all challenge the unit economics of the business. 
• Intensified Credit Risk Management: The central challenge in lending to the NTC segment is the accurate assessment of credit risk. The lack of traditional credit data makes it inherently difficult to underwrite these customers, leading to a higher risk of defaults.The RBI's primary concern was that in the old partnership model, this risk was being borne by unregulated fintechs through informal FLDG arrangements, without the necessary regulatory capital to back it up. This created a significant systemic risk.By making the REs solely responsible, the RBI has forced the issue of robust, data-driven underwriting to the forefront.  
• The Constraining "Funding Winter": The global downturn in venture capital funding has severely constrained the ability of cash-burning fintechs to expand their loan books and absorb operational losses.This "funding winter" has made the quest for a sustainable, profitable business model not just a long-term goal but an immediate survival imperative.  

The RBI's Digital Lending Guidelines should not be viewed as an attack on the BNPL product itself, but rather as a fundamental rejection of the model of regulatory arbitrage. By mandating direct fund flows and making REs the sole point of accountability, the RBI's primary objective was to restore a clear and transparent chain of responsibility for credit risk, which had become dangerously blurred. The guidelines did not ban BNPL; they banned the specific structure where an unregulated intermediary could sit in the middle of the credit, risk, and cash flow. This regulatory "rewiring" forces a strategic pivot from a focus on customer acquisition at all costs to one on sustainable, risk-assessed lending. The future winners in this space will not be those with the slickest app, but those who can build the most robust, compliant, and intelligent underwriting and partnership models.

Table 3: The Impact of RBI's Digital Lending Guidelines on Legacy BNPL Models

Section 5: Reimagining BNPL for India: A Blueprint for a Sustainable and Inclusive Future (BNPL 2.0)

The regulatory reset by the RBI, while challenging, has cleared the path for a more mature, stable, and ultimately more valuable iteration of Buy Now, Pay Later in India. The future does not lie in resurrecting the old models but in architecting a "BNPL 2.0" framework that is innovative, compliant, and purpose-driven. This section outlines a blueprint for such a model, built on core principles of responsibility and powered by technology to achieve genuine financial inclusion.

5.1 Core Principles of BNPL 2.0: Transparency, Responsibility, and Value Creation

The foundational philosophy of BNPL 2.0 must represent a departure from the growth-at-all-costs mentality of its predecessor. Its design and operation must be guided by three unwavering principles:

• Radical Transparency: The model must be transparent by design, fully embracing the spirit and letter of the RBI's disclosure norms. This means providing the standardized Key Fact Statement (KFS) and a clear, all-inclusive Annual Percentage Rate (APR) for every loan, ensuring the customer understands the total cost of credit before committing.There can be no hidden charges or opaque terms.  
• In-built Responsibility: The primary objective must shift from merely enabling a transaction to ensuring the borrower's capacity to repay. The framework must be engineered to prevent over-indebtedness, using robust underwriting and proactive monitoring to offer credit lines that are appropriate for the user's financial situation.
• Tangible Value Creation: BNPL 2.0 must offer consumers value that extends beyond the convenience of deferred payment. It must function as a constructive financial tool, providing a clear pathway to building a formal credit history, offering personalized financial insights, and improving the user's overall financial literacy and health.

5.2 The Architectural Framework: A Hybrid Model for a New Era

The proposed BNPL 2.0 architecture is a compliant hybrid model. It leverages fully transparent partnerships between fintechs (as LSPs) and Regulated Entities (REs), where roles are clearly delineated as per RBI guidelines. The fintech partner brings its expertise in technology, user experience, and data analytics, while the RE provides the capital and holds the ultimate responsibility for the loan. The model is built upon three interconnected pillars that work in concert to deliver a compliant, scalable, and inclusive credit solution.

5.3 Pillar 1: Technology-Driven Responsible Lending

In BNPL 1.0, technology was primarily used to optimize for speed and convenience in customer acquisition. In BNPL 2.0, technology's primary role must be to enable precision, compliance, and responsibility in lending.

• AI-Powered Underwriting: The engine of BNPL 2.0 is a sophisticated underwriting model powered by Artificial Intelligence (AI) and Machine Learning (ML).For the vast NTC segment, traditional credit bureau scores are non-existent. AI/ML algorithms can analyze a wide array of alternative data points to create a nuanced and predictive assessment of a borrower's intent and ability to repay, enabling the fast and accurate credit decisions that are essential to the BNPL experience. 
• Alternative Credit Scoring (ACS): The model must be built on a foundation of alternative data, a practice explicitly supported by the RBI Deputy Governor as a means to foster financial inclusion.In a privacy-compliant and consent-based framework, this involves analyzing a rich tapestry of data sources beyond a traditional credit file. These can include digital footprints, utility bill payment history, bank account transaction data (accessed via the Account Aggregator framework), and even GST returns for small business lending.This allows lenders to serve creditworthy individuals who are invisible to the traditional credit system.  
• Embedded Regulatory Technology (RegTech): To navigate the complex compliance landscape efficiently, the BNPL 2.0 platform must embed RegTech solutions at its core. This includes automating the Know Your Customer (KYC) process, implementing real-time monitoring of transactions to detect fraud and money laundering (AML/FRM), and automating the reporting of loan data to credit bureaus and the RBI's Centralised Information Management System (CIMS) portal.This not only ensures adherence to regulations but also significantly reduces the operational burden and risk of non-compliance.  

5.4 Pillar 2: Deep-Tier Financial Inclusion

BNPL 2.0 must consciously expand its focus beyond the urban, e-commerce user to address the credit needs of the wider, underbanked population in Tier-2, Tier-3, and rural India.

• Strategic Partnerships for Deeper Reach: The partnership model must evolve beyond integrations with large e-commerce platforms. BNPL 2.0 should forge strategic collaborations with entities that have deep grassroots connections. This includes working with Self-Help Groups (SHGs), Microfinance Institutions (MFIs), and leveraging government-backed initiatives and CSR programs to introduce digital credit to rural and semi-urban populations.Initiatives like the partnership between BHIM and Fintech Yatra provide a template for using a "train-the-trainer" model to spread digital and financial literacy at the community level. 
• Vernacular Interfaces and Voice-Enabled Technology: To be truly inclusive in a country with immense linguistic diversity, the user interface cannot be limited to English. The BNPL 2.0 app must offer multiple vernacular language options. Furthermore, to overcome literacy and digital familiarity barriers, the model should incorporate voice-based navigation and authorization tools, a critical innovation for driving adoption in new markets. 
• Phygital (Physical + Digital) Delivery Models: Reaching the next 100 million users will require a "phygital" approach. This involves expanding BNPL acceptance at offline Point-of-Sale (POS) terminals in local stores, a trend that is already gaining momentum.For high-trust sectors like healthcare, education, or agricultural inputs, a human-assisted digital model—where a local agent or representative helps a customer navigate the digital onboarding process—can be highly effective in building confidence and driving adoption. 

5.5 Pillar 3: The Empowered Customer Journey

The customer journey in BNPL 2.0 must be redesigned from a simple transactional path to an empowering and educational experience.

• Hyper-Personalization: The rich data collected for underwriting should be used to create a highly personalized experience for the user. This means offering dynamic and appropriate credit limits, flexible repayment schedules tailored to the user's cash flow, and relevant product recommendations, moving away from a one-size-fits-all approach. 
• Embedded Financial Literacy and Control: The user journey itself must become a tool for financial education.This can be achieved by integrating features directly into the app, such as:  
  • Simple, interactive explanations of the KFS and loan terms at each stage of the process.
  • Intuitive budgeting and spending tracker tools that help users visualize their financial health.
  • Proactive "nudges" and alerts that warn users about upcoming payments or if their spending patterns indicate potential over-extension.
• Seamless and Transparent Grievance Redressal: A core feature of the platform must be a clear, easily accessible, and responsive grievance redressal mechanism, as mandated by the RBI. Providing a straightforward process for users to raise concerns and have them resolved promptly is fundamental to building long-term trust and ensuring robust consumer protection. 

The key to a successful BNPL 2.0 lies in this strategic reframing of technology's role. By shifting from using technology for mere acquisition speed to using it for underwriting precision and regulatory responsibility, the model becomes both scalable and regulator-friendly. This transforms the BNPL provider from a simple "slick front-end" for a bank into a genuine "risk assessment partner," adding demonstrable value to the RE and justifying its crucial role in the new ecosystem. Ultimately, a successful BNPL 2.0 could become the de-facto credit-scoring engine for India's vast NTC population. By responsibly disbursing small-ticket loans and meticulously tracking repayment behavior, these platforms will generate the very first stream of formal credit data for millions. This data, when reported to bureaus, becomes their passport to the entire formal financial system, unlocking future access to larger loans, mortgages, and other financial products. BNPL 2.0 thus evolves from a simple payment method into a powerful, nationwide platform for financial mobility.

Table 4: Architectural Blueprint of the Reimagined BNPL 2.0 Model for India

Section 6: The Transformative Impact on the Indian Customer

The transition to a regulated, technologically advanced, and responsible BNPL 2.0 framework promises a transformative impact on the Indian consumer, moving far beyond the simple convenience of deferred payments. The new model is architected to deliver tangible, long-term benefits that foster financial health, democratize access to credit, and build a safer, more trustworthy digital ecosystem.

6.1 Beyond Transactions: Fostering Financial Discipline and Health

The primary shift in the customer experience under BNPL 2.0 is the move from a purely transactional relationship to an educational and empowering one. The legacy model, with its opaque fees and focus on frictionless spending, often encouraged impulsive behavior and created risks of a debt trap. 

The reimagined model fundamentally reverses this. By embedding financial literacy tools directly into the user journey, BNPL 2.0 becomes a practical classroom for financial management. Features like in-app budget trackers, spending analysis, and proactive alerts for upcoming payments help users develop a conscious understanding of their financial habits. The mandatory Key Fact Statement (KFS) and the clear disclosure of the Annual Percentage Rate (APR) demystify the cost of credit, teaching users to evaluate loan terms critically.This structure helps consumers understand the direct consequences of borrowing and internalize the importance of timely repayments, thereby fostering a culture of financial discipline rather than one of reckless spending. It transforms the act of taking a small loan from a blind leap into a considered financial decision.  

6.2 Democratizing Access: A True Bridge to the Formal Credit Ecosystem

Perhaps the most profound impact of a well-regulated BNPL 2.0 is its potential to serve as a genuine and powerful on-ramp to the formal financial system for millions of "credit-invisible" Indians. The structural credit gap in India means that a vast population has no opportunity to build a credit history, permanently locking them out of access to larger, more significant financial products like vehicle loans, home loans, or business capital. 

BNPL 2.0 is uniquely positioned to bridge this gap. By using alternative data to grant a small, manageable line of credit to a New-to-Credit (NTC) user, the platform provides their very first interaction with formal lending. As the user repays these small loans on time, the BNPL provider, now operating as a compliant Lending Service Provider (LSP), reports this positive repayment behavior to the Credit Information Companies (CICs).This process generates the first data points for the user's formal credit file.  

Over time, a consistent history of responsible BNPL usage builds a robust credit score from scratch. This score becomes a portable, verifiable asset that the consumer can then use to access the wider world of formal finance. In this capacity, BNPL 2.0 evolves from being a simple payment method into a crucial "credit-builder" product, a foundational stepping stone that democratizes access to economic mobility and empowers individuals to participate more fully in the economy.

6.3 A Safer Ecosystem: The Compounding Benefits of Enhanced Protection and Trust

Finally, the comprehensive regulatory framework governing BNPL 2.0 creates a fundamentally safer and more trustworthy environment for the consumer. The ambiguity and risks of the "wild west" era are replaced by clear rules of engagement.

Consumers can now transact with the confidence that their data is protected under strict governance norms, that they will not be subjected to predatory or unethical recovery practices, and that they have recourse through a clear and accessible grievance redressal mechanism.The knowledge that a regulated entity like a bank or an NBFC is ultimately responsible for the loan, and that the entire system is under the oversight of the RBI, builds immense consumer trust.  

This trust is not a soft benefit; it is the bedrock of a mature digital economy. When consumers feel safe and protected, they are more willing to engage with digital financial services, driving deeper adoption and fostering a virtuous cycle of growth and innovation. The regulated nature of BNPL 2.0 ensures that this growth is sustainable and that the benefits of digital credit are delivered to the consumer without the accompanying perils of the past.

Conclusion: From Regulatory Conundrum to a New Dawn for Credit in India

The journey of Buy Now, Pay Later in India has been a compressed and intense narrative of digital disruption, regulatory reaction, and now, the necessity of reinvention. The Reserve Bank of India's stringent Digital Lending Guidelines were not a repudiation of BNPL as a concept, but a decisive end to the era of regulatory arbitrage. The "wild west" of unchecked growth, fueled by opaque structures and ambiguous risk-bearing, is definitively over. This intervention, however, should not be viewed as a closure, but as a crucial clearing of the ground, creating the necessary conditions for a more resilient, sustainable, and impactful industry to emerge.

The path forward is not to seek new loopholes but to embrace the new paradigm. This whitepaper has laid out a blueprint for a "BNPL 2.0" model that is architected for this new reality. It is a model that shifts the focus of technology from enabling speed to ensuring responsibility. It leverages the power of AI and alternative data not just for frictionless onboarding, but for sophisticated, compliant, and responsible underwriting. It expands its vision beyond urban e-commerce to pursue deep-tier financial inclusion through innovative phygital models and strategic grassroots partnerships. Most importantly, it redesigns the customer journey to be an empowering and educational experience, transforming a simple payment tool into a vehicle for financial literacy and health.

This reimagined BNPL has the potential to be a profoundly positive force in the Indian economy. For fintechs and financial institutions, it presents a commercially viable path to serving the largest untapped credit market in the world, built on a foundation of sustainable unit economics and regulatory alignment. For the Indian consumer, particularly the millions who remain outside the formal credit system, it offers a safe, transparent, and constructive first step onto the ladder of economic opportunity. By providing a regulated on-ramp to building a credit history, BNPL 2.0 can unlock access to the entire spectrum of financial services, becoming a powerful engine of social and economic mobility.

The regulatory conundrum has been resolved. The challenge now is one of execution and vision. By building a future for BNPL based on the pillars of responsible technology, deep inclusion, and customer empowerment, the industry can move beyond its tumultuous adolescence and fulfill its ultimate promise: to bring millions of Indians into the formal credit economy, safely, responsibly, and for the betterment of all.