Engineering @Zeta

Buy Now Pay Later: How Does it Work?

In our previous 2 blogs (BNPL: The Modern-day Credit Card & BNPL: The Real Deal or Just Hype), we compared the buy now pay later model to traditional credit cards and looked at its market share, both globally and in India. While it is a viable alternative to credit cards, has gained a lot of worldwide traction, and is capturing a lot of market share, how does it work?

Operating Models

Buy now pay later has multiple operating models.

  • EMI with interest
  • EMI without interest
  • Deferred payment model
  • Down payment and loan model
  • Hybrid model. Allows users to defer the down payment and the balance is converted to EMIs.


EMI with interest

Here, the entire bill amount is converted to a loan.

  • Interest rates vary between 12% — 36%.
  • 2 months to 36 months loan term.
  • EMI amount includes interest charged. EMI = (Principal + Interest)/Tenure.

EMI without interest

Here, companies refund the interest as a cashback to the customer or as a discount on the price of the product or service.

  • Effective interest rate of 0%.
  • Fixed or short-term loans (up to 12 months).
  • EMI does not have an interest component. EMI= Principal/Tenure.

Deferred payment

Here, the bill amount is converted to a short-term loan, which the customer pays back to the company within a fixed duration (typically 15 or 30 days).

In this scenario, companies may charge the customer processing fees or convenience fees.

Down payment loan model

This is similar to traditional loans. A customer makes a purchase by making a downpayment and the balance amount is converted to EMIs.

Here, companies charge customers an interest, which is added to the EMI.

This is mostly used by companies such as Bajaj Finserv and Home Credit for offline transactions. Each transaction is treated as a separate loan and reflects in the customer’s CIBIL report.

Hybrid Model

This is a combination of the deferred payment and down payment loan model.

Customers can pay the entire bill amount back within a fixed duration or convert the amount to EMI.


Typically, companies do not charge customers registration fees or annual maintenance fees to use their buy now pay later product. This, however, does not mean that there are no charges when you make payments using the buy now pay later option.

Apart from interest, companies charge customers processing and convenience fees, among other fees. While these are lower than what traditional credit cards would charge you, they are not non-existent.


Interest on loan amount

Interest charged on the loan. Varies between 12% and 36% and it can go up to 66%.

The interest rate depends upon the company’s business model, total loan amount, product or service purchased, and loan tenure.

Processing fee

A fee is charged to process the transaction. Typically 0%. However, some companies might charge a small amount.

Convenience fees

A fee is charged to use the service. Varies from company to company.

For example, Paytm charges 0% — 3% on your net monthly spending.

Late fee

Fee charged when you miss your payments. This varies from company to company and the outstanding amount.

Interest on non-payment of minimum amount

The interest charged when you do not make the minimum monthly payment.

Varies from company to company. Could be between 18% and 36%.

Preclosure charges

Amount charged to close your loan early.

Varies from company to company. For example, LazyPay charges 4% of the outstanding amount when you close your loan early.

Revolve fees

Fee charged when you request for an extension on the due date. Varies from company to company.

When you request for an extension, you are not charged late fees or interest for missing your minimum monthly payment.

If granted, allows you to make payment at a later date without it being marked as a non-payment by the company and your CIBIL score is not affected.

Activation fees

Most companies do not charge you an activation fee. However, some do. For example, Mobikwik charges you a 1-time activation fee of ₹99.

Other fees

Some companies have others charges such as joining fees, subscription fees, annual charges, or EMI bounce charges.

For example, Dhani Pay has a subscription fee varying between ₹199 and ₹1,799 per month.

Companies such as Bajaj Finserv and Home Credit charge an annual fee of ₹99.

Future of Buy Now Pay Later

There has been an increased uptake for the buy now pay later model in the educational sector as well. School and college fees are not small payments, especially when they are paid quarterly or annually. The buy now pay later model has made it easier to make these payments.

UPI payments have made digital payments more accessible to everyone in India. The tea shop down the road and even your local barber accept UPI payments. Companies such as LazyPay have integrated buy now pay later with UPI to capitalize on the popularity of UPI and make buy now pay later more accessible.

Other companies such as Slice, ZestMoney, Mystro, Krazybee, and Lazypay are exploring new ways to offer buy now and pay later to customers. One such idea is to offer gift vouchers on EMI. Users can purchase gift vouchers of different amounts and different brands and pay for them using the buy now pay later method. This means financial institutions need not tie up with merchants to offer buy now pay later to their customers. This will make a popular product even more popular and more accessible.

Thank You

Phani MarupakaHemchander Gunashekar

Buy Now Pay Later: The Real Deal or Just Hype

In our previous blog (BNPL — The Modern Day Credit Card), we compared buy now pay later to traditional credit cards. We compared the two products and spoke about the different types of buy now pay later offered to customers. But, is buy now pay later all it is made out to be or is it just a flash in the pan?

Global Market

Globally, providers such as Klarna, Afterpay, and Affirm have paved the way for the buy now pay later ecosystem. In 2019, buy now pay later had a global market size of US$7.3 billion. Coherent Market Insights, expected it to grow to US$33.6 billion by 2027 at a CAGR of 21.2%.

While Australia and Sweden were the top markets a few years back, the buy now pay later trend has caught on in the UK and the US.

Worldpay suggests that buy now pay later spending in the UK would rise from £9.6 billion in 2020 to £26.4 billion in 2024. According to Fobes, Americans made $20 billion worth of purchases using BNPL programs in 2019 and will spend $24 billion on products and services using a BNPL service in 2020.


Key Metrics


  • Operations in Australia, USA, UK, New Zealand.
  • 7.3 Million users.
  • Major Market: USA
  • Market Cap: $17.7BN


  • Operations in 15 countries.
  • Market Cap: $33BN


  • Operations in USA & CANADA
  • Market Cap: $16.73 Bn

Indian Market

The trends are similar in India. Businesswire expects the buy now pay later payment adoption to grow steadily between 2021 and 2028, recording a CAGR of 24.2%. It expects the gross merchandise value in India to increase from US$ 6.990.5 million in 2020 to US$ 52827.2 million by 2028.

Buy now pay later is offered by multiple companies in India. LazyPay, ZestMoney, and Simpl are few of the pure buy now pay later companies. Other e-commerce companies such as Amazon and Flipkart, wallet providers such as Paytm and Mobikwik, banks such as ICICI and HDFC, and payment gateways such as Razorpay offer this as an option to their customers.


Key Metrics


  • 4 million active users.
  • 2 million transactions per month (December 2020).
  • 250+ merchant base.


  • 6 million registered users in (February 2020).
  • Average transaction: Rs. 12,000/-
  • Tie-up with 15,000+ merchants.

Flipkart PayLater

  • 65 million existing Flipkart users.
  • Active on Flipkart, Myntra and 2Gud.
  • Focuses on customers tier 2 and tier 3 cities.

Paytm Postpaid

  • 7 million users (November 2020).
  • Tie-up with 5 lakh+ merchants.

ICICI PayLater

  • Available only to ICICI Bank customers on ICICI platforms such as Pockets, iMobile App, and their bank website.
  • Default payment option Razorpay buy now pay later customers.

Bajaj Finserv

  • Available all over India.
  • Available in offline and online stores.
  • 8000+ stores online stores
  • 1 lakh+ offline stores in 1900+ cities


  • Provides buy now pay later via POS machines
  • Has 95% of the offline buy now pay later market share.
  • 30 million users.
  • Tie-up with 1.5 lakh merchants.

Here to Stay

Buy now pay later is an attractive offering from financial institutions. In 2020, buy now pay later accounted for 2.1% of ecommerce transactions worldwide, according to Worldpay. This number is expected to double by 2024.

In India, buy now pay later grew over 30% in 2019. According to a survey conducted by ZestMoney in 2020, 60% of women surveyed said they would use buy now pay later and 51% said they prefer it over credit cards.

Buy Now Pay Later: The Modern Day Credit Card

Zeta, the 14th Indian unicorn in 2021, is rethinking payments from core to the edge, algorithms to form factors, applications to solutions. Cipher, one of Zeta’s offerings, was able to successfully handle 1 Million Transactions per Second (1M TPS), illustrating the scalability and elasticity with which banks can handle online transactions. In our endeavor to make payments invisible, we are exploring and evaluating the buy now pay later payment (BNPL) model.

BNPL allows consumers to make purchases without any upfront payments. A modern-day offering from financial institutions, BNPL offers consumers small loans to buy the products or services they want. These loans are typically interest-free as long as they are paid back within the specified time frame.

Key features of BNPL are:

  • Easy and instant credit to people in the 18–40 age group with little to no credit history.
  • Offer interest-free EMIs to the consumers for online or offline purchases and includes school fees, college fees, and medical bills.

BNPL vs Traditional Credit Cards

In today’s world where customers are spoilt for choice and want to be rewarded for making purchases, taking more than a few minutes to onboard a customer and adding extra charges and hidden fees to their payments is a turnoff. Financial institutions also want to capitalize on the trend of instant buying by offering a quick checkout experience where first-time customers do not have to enter details such as card number, CVV, and OTP to make a purchase.

BNPL has grown in popularity with customers and financial institutions because of its various benefits over traditional credit cards.

BNPL accounts can be created instantly within minutes making it the more convenient option for first-time users. Credit cards traditionally could take up to a week to be approved and then there is the time it takes for it to be shipped to the customer. The customer then has to activate it before they can use it.

Unlike traditional credit cards, BNPL charges very little in terms of registration fees, annual charges, processing charges, convenience fees, etc. making it more appealing to customers.

This is not to say BNPL does not charge customers anything extra. In the BNPL model, fees are mostly charged in the form of interest for the borrowed amount and late fees for missed payments. However, most financial institutions offer 0% EMI on BNPL payments, making it even more popular. This has helped rapidly grow the BNPL customer base.

Credit Cards: A thing of the past?

The BNPL industry has grown both globally and in India over the last few years. The 2020 pandemic has only increased its popularity.

In India, the payment option has grown in popularity in tier 2 and tier 3 cities where consumers do not have easy access to credit cards or cannot get easy short-term, low-interest loans.

BNPL has numerous advantages over traditional credit cards. Traditional credit cards still have a place, especially for corporate applications, but the benefits and convenience BNPL offers are sure to see it continue to grow in popularity over the next few years.

Up Next…

In our next blogs (BNPL: The Real Deal or Just HypeHow Does BNPL Work) , we will discuss the global and Indian BNPL market and go into detail about how the BNPL model works.