A Case Study on Buy Now, Pay Later Adoption and Default Rates in a Tier-2 City
For decades, banks controlled India’s credit landscape. Taking credit brought with it layers of paperwork, waiting, proof of income, and silent dread of rejection. But today, loans arrive through push notifications. You can get approvals within seconds, where a ₹5,000 purchase can be split into monthly payments with a tap. It was not the banks’ transformation; it was the Amazon Flipkart transformation. These e-commerce giants have silently become money-lending powerhouses, challenging traditional lenders in a way the country has never seen.
BNPL is their most potent weapon. It is as simple as. Nowhere is it clearer than in India's tier-2 and tier-3 cities, which have never had consistent access to formal credit. The buy now, pay later (BNPL) service of Flipkart is changing the way people are borrowing and shopping. This is happening in cities such as Visakhapatnam (Vizag) and Lucknow. Looking at the ground situation makes it clear that India’s next financial revolution is happening not in big metros but in these upcoming urban centres.
Why E-Commerce Companies Want to Become Lenders
The concepts of Amazon Pay Later and Flipkart Pay Later never aimed at being tiny features. They show a deeper strategy built on a better understanding of Indian consumers. Most people don’t want large, long-term loans. People want to obtain a small loan with the least documents and no fear of rejection, while also avoiding dealing with a bank. Traditional banks designed their systems for salaried, metro customers. E-commerce companies based their operations on the Indian reality.
What banks can only imagine, Flipkart and Amazon already have access to behavioural data. They know what customers search for, how long they consider a product before buying, whether they usually pay on time, whether they prefer fashion or electronics, and even the price range they’re comfortable with. By doing so, they will be able to customise credit at a more precise level than the entity that relies on only a CIBIL score. The system is personal, frictionless, and surprisingly intuitive.
The distinction between the marketplace and NBFC has already become unclear. In a technical sense, they are not a bank, but practically, they are. They determine who qualifies, how much credit a user receives, how repayments are handled, and how spending patterns are assessed. The platform manages the total user experience, while the legal aspect for loans is assigned to an NBFC partner. The platform becomes a grey area, acting like a bank, but not regulated as a bank.
Case Study: Flipkart Pay Later in Vizag
To gauge the actual effect of this change, it is useful to consider BNPL adoption in Visakhapatnam (Vizag), a tier-2 city that embodies changing India. Vizag's population is youthful, aspirational, and rising in purchasing power and Internet penetration. But many still cannot get formal credit, owing to little banking history or irregular income.
In Vizag, Flipkart Pay Later is gaining traction at a rapid pace. Almost four in ten repeat customers were activated within a year of introduction. Young adults in the age group of 21-30 years were the strongest adopters of BNPL as they viewed it as a zero-risk facility rather than a loan. It was mainly used for smartphones, fashion, kitchen appliances and festive-season purchases. For these consumers, BNPL didn’t feel like borrowing; it felt like convenient access to better goods.
But adoption tells only half the story. Vizag also revealed emerging challenges. Initially, defaults in the loan scheme were in seven to ten per cent of cases. Concentration of defaults was seen among first-time BNPL users with unstable monthly income. The largest increase happened after substantial festivals and sales, during which people spent impulsively. Notably, if users finished one or two repayment cycles each, their default chances dropped sharply. Repeat users always show more disciplined repayment behaviour.
Small businesses in Vizag began feeling the impact too. Many local retailers observed that customers who used to buy electronics or household goods from them were now shifting to Flipkart just for the easy credit option.Banks, which previously targeted young consumers for credit cards or small loans, realised they were losing potential clients to BNPL services that felt simpler, faster, and less intimidating.
The Opportunity and the Risk
BNPL is helping millions of Indians previously neglected by formal banking institutions get easy access. For people living in Tier-2 and Tier-3 cities, this is their first experience with a digital credit structure. It allows them to buy things they previously delayed or avoided. It also speeds up the growth of small manufacturers that mainly sell through online marketplaces. Financial inclusion for the growing middle class is what BNPL can work out to be for India.
But this growth brings real risks. Consumers do not consider BNPL as a debt and encourage frictionless spending. Late fees and interest penalties often come as a surprise. Financial literacy gaps make borrowers vulnerable. Default rates might increase sharply due to weakening employment conditions or rising inflation. Since BNPL ecosystem relationships are shallow in nature - unlike the relationship with a bank built over the years - the platforms have no incentive to understand or support the long-term wellbeing of borrowers.
This is where regulation must evolve. India’s central bank is already trying its hand at regulating digital lending, but credit originated by e-commerce is in a grey sector. To safeguard the inexperienced borrower, maintain the strength and stability of our financial system and stop predatory lending, as adoption happens, we must establish clear guardrails.
Traditional Banks Are Now Playing Catch-Up
Banks initially dismissed BNPL as too small to matter. Today, they see how deeply it has penetrated India’s credit culture. They are responding by launching their own BNPL-style products, partnering with fintechs, and integrating instant credit into UPI payments. But Amazon and Flipkart still hold the biggest advantage: consumer data and everyday visibility. Banks may issue credit, but e-commerce platforms influence what people buy, when they buy it, and how much they spend. This is why the FinTech War is not just about credit. It is about who understands the Indian consumer best.
The next phase in the financial evolution of India is in tier-2 and tier-3 cities. Platforms like Amazon and Flipkart are changing the rules of consumer credit. They are doing this by meeting people where they are, offering convenience instead of paperwork, speed instead of judgment, and micro-credit instead of long-term debt. However, it also brings new responsibilities and risks.
Managed properly, BNPL can expand financial inclusion and empower millions. Failing to notice that can lead to debt cycles, regulatory clashes and wider inequality. Whatever happens next, it will define the future of not just the retail credit but the future of India’s digital economy.
. . .
References: