Amazon Pay Later Scheme and the increasing consumerism in India

Recently, Amazon has started its paylater scheme in India. It is a scheme that enables a consumer to buy a product now and pay later. The consumer has two option of paying, first pay in whole the next month and second pay via EMIs ranging from 3 to 12 months. Now you might say that EMI options were available earlier also, so what’s new, unlike earlier EMI options now you don’t need any credit or debit card to avail. It is an instant credit facility availed without any card details or bank statement, you just need to have a PAN. 

(Read this article to know more about Amazon Pay Later Scheme)

Moreover, the Amazon pay later scheme is the beginning of seller-financed e-commerce in India. In this case, a person selling the item itself is giving you the money to buy it. So what’s wrong, how does it matter who lends the money, let’s consider a situation:-

You have decided to buy a television set so visit your friend’s shop and decide to buy the latest smart TV that’s in your budget. Now having decided on the TV, the seller (your friend) shows you a home theatre system that enhances the sound quality and brings in a theatre like feeling. But you are out of budget, meanwhile, your friend having guessed your situation says “Arey paise baad mein de dena abh leja” (Don’t worry, pay me later just take it). 

Faced the above situation, you ended up buying an extra item just because you friend extended a credit, if there had been no credit, you would still be enjoying the latest movie in HD quality without having any debt to pay. Now this is a similar kind of situation Amazon Pay Later scheme has to offer with two differences, first, unlike you friend Amazon will charge interest and second, it will offer credit to millions resulting in increasing consumerism.

So what credit cards have also been doing the same thing?

Yes, but at least the credit card spending would instantly show up on your credit card statement and the remaining limit would also continuously send signals of increasing debt. But the debt offered by Amazon Pay won’t show up at least up to next month and even then would not show up in whole, leading to Conspicuous Consumption and ever-mounting Debt Cycle.

Adding to the issue is the fact that this is just the beginning, various other companies are exploring such lending facilities. According to some reports, WhatsApp is looking to add a lending feature and the recent deal between Reliance and Facebook that enables WhatsApp to be used for JioMart  will bring seller financing to every door step, the effect of which can be a change in Indian consumer mentality leading to excessive consumption and decline in the savings rate.

According to a 2018 research done by SBI, in the last five years, household leverage has jumped up by two times while disposable income by on 1.5 times, thereby putting pressure on savings.

The SBI research further said, Indian household savings, the pivot of the economy, deflated to a record low at the end of the financial year 2018, raising fears that the consumer might face debt heat as their financial liability surged 58 per cent to Rs 7.6 lakh crore in the last five years.

Then, why does governments allow such easy and instant credit?

Government has its own incentives, in most of the nations the consumption expenditure accounts for 60-80% of their GDP. In other words, to keep running the GDP’s growth engine government has to fuel up the rate of consumption. Additionally having an aim of 5 trillion economy and auto sector already facing the Uberization of the daily commute, no government would like to miss the opportunity of increasing consumption. But certainly, this comes with long term side-effects -

Conspicuous Consumption

It is a term coined by Thorstein Veblen in 1899, for the spending of money on acquiring luxury goods and services to display economic power and attaining social status. Then it was mostly used for affluent class but now the definition has changed and such behaviour can now be seen in all classes especially in the salaried upper-middle-income category. Larger homes, expensive cars, branded clothes, premium services etc are now being considered as essentials leading to the rise of consumerism.

But isn’t more consumption will lead to higher disposable income? Certainly, but as the income rise, people tend to expand their list of necessities, just for example recently one of my friends ridiculed me for not having Netflix Subscription and considered it as mandatory to have. In a country like USA with a per capita income of $63690 (source), approximately 8 times that of India, more than 40% do not have sufficient savings to cover an unexpected expense of just $400 (source).

Most of the time the intent to buy the intangible subscription is a result of a sudden urge to watch the latest web-series but all the hassle of entering your card details or a feeling of outflow of money reduces that urge and as a result, the bounce rate from the payment page is very high. The schemes like Amazon Pay Later will capitalize on such an urge to buy. Moreover how much it costs just a few bucks right but the lifetime cost is high suddenly YouTube ads will start to bother you.

Taking Guilt away from Debt

Haven’t you refused a personal loan many times? Why it is a straight NO-NO for personal loans? It's because of the dogma attached with it, personal loan portrays one as being in a bad financial state. Consider two options –

A) Personal Loan, Interest Rate @12% pa

B) Buying a product costing 8000/- on 6 months EMI paying 1385/- per month i.e. total of 8310/-

Most of the people without hesitation would choose option B. First because it's just 300 bucks more and second because everyone is doing it and there is no shame attached to it. Keeping aside the herd part, the 310/- more is 13% compound interest per annum. So a pay later or pay in EMI scheme is same as taking a personal loan but in a smaller amount. This same as the innovative technique adopted by Cavin Care by launching Re 1 sachets of chick shampoo in 1983.

Forestalling Expenses

The pay later schemes are just a way to transfer your expenses to another month or a later date. It is a way of manipulating one’s personal finance state just as done by large corporates by modifying accounting policy as simple as the depreciation technique to show a rosy picture in the near term. Adding to this the slowly mounting debt leads the company to an inevitable fall, history has many such examples. These small mounting debt will take a dig in your savings, increase stress, resulting in more situations needing emergency expenses worsening one’s overall financial condition.

Win-Win for the seller

With more such schemes the main beneficiary is the seller or the e-commerce platform as it will lead to a rapid rise in revenue translating to their valuations. Consider a situation wherein you a buy a product using Amazon Pay Later scheme but you don’t like it and you return the product, what happens now, you still be required to pay the interest charges. So you end up paying something for nothing. This would help platforms ease some burden of “Free Return Policy” offered by them.

Heard of the saying “A penny saved is a penny earned”, and this saved money only helps you sail through the tough time like Covid-19 especially in a country where the public health system is weak and no facility of unemployment allowance. Nevertheless, the introduction of such new avenues of credit is certainly inevitable, the ball will be in the individual’s court whether to take it or leave it. This will also have long term impacts on consumers.

What are your thoughts on this? Please comment below and share this article with your colleagues