Pay Later from first principles

What a lender in India must solve to let someone pay in 15 or 30 days, and who pays for a loan that earns nothing when the shopper is on time.

Thesis: Pay Later is a 15- or 30-day loan that earns nothing from a shopper who pays on time, so the merchant, the late payer or the platform must fund the float. India’s rules decide which may, and keep pushing the business toward banks.

Start from zero

A shopper wants ₹1,200 of groceries today and to pay on the 5th of next month. For a lender to say yes, five things must be true.

Identity: a Permanent Account Number (PAN), a phone verified by One-Time Password (OTP), and an Aadhaar check.
Underwriting that works on thin credit files, in a second, at checkout.
A limit, not a loan. One approval must cover dozens of purchases, each too small to underwrite alone.
Collection that pulls. Chasing a ₹1,200 bill by phone costs more than the margin.
Money for the float, from a balance sheet the Reserve Bank of India (RBI) allows to lend.

That is the gap from an Equated Monthly Instalment (EMI) plan, which keeps money out for months, paid for by interest or a merchant subsidy, as in my Snapmint essay. Pay Later keeps it out for weeks, free to the shopper who pays on time.

The primitives

Identity sets the ceiling. Under RBI Know Your Customer (KYC) rules, a borrower onboarded only by Aadhaar OTP-based electronic KYC (e-KYC) can take at most ₹60,000 of term loans a year. Amazon Pay Later applies this as a ₹60,000 “regulatory credit” counting every purchase, returns included, until full KYC.

Underwriting is the platform’s data. Flipkart’s new Pay Later with PayU Finance, launched in July 2026 across Flipkart, Myntra and Flipkart Minutes, leans on a decade of commerce data.

The limit revolves on a short cycle. LazyPay, lent by PayU Finance India, bills on a 15-day or 30-day cycle, with pay-by dates such as the 3rd and 18th. Amazon Pay Later, lent by Axio (CapFloat Financial Services) or IDFC FIRST Bank, bills a month’s purchases together, due on the 5th. Repayment restores the limit.

Collection is a mandate. Amazon requires an auto-repayment mandate at the first purchase and reminds the shopper three to four days ahead. LazyPay charges ₹300 when an auto-debit bounces.

Funding is where the rules bite.

No wallets loaded from credit. In June 2022 the RBI told non-bank issuers of Prepaid Payment Instruments (PPIs) to stop loading wallets and prepaid cards from credit lines, which forced fintech cards built that way to shut or rebuild.
A 5% ceiling on skin in the game. A fintech acting as a Lending Service Provider (LSP) for a bank or Non-Banking Financial Company (NBFC) may absorb first losses only through a Default Loss Guarantee (DLG) capped at 5% of the amount disbursed. To keep the whole spread you need your own licence, as Flipkart Finance got in March 2025.
Credit on the Unified Payments Interface (UPI), for banks only. Since September 2023, banks can link a pre-sanctioned credit line to UPI, so a limit pays at any Quick Response (QR) code. Small finance banks joined in 2025, and since 31 August 2025 the National Payments Corporation of India (NPCI) also allows person-to-person (P2P) payments on them. ICICI Bank launched one in PhonePe in 2024, up to ₹2 lakh (a lakh is 100,000) for 45 days. NBFCs still cannot offer credit on UPI.
Do not become a payment system. Simpl offered an interest-free 15-day bill at more than 26,000 merchants, by its own count, paid for by merchants. On 25 September 2025 the RBI ordered it to stop payment, clearing and settlement, saying it ran a payment system without authorisation under the Payment and Settlement Systems (PSS) Act, 2007.

One more rule is a draft. On 6 August 2026 the RBI proposed that NBFCs, except those authorised to issue credit cards, offer only term loans, whose limit “cannot be restored / replenished” once repaid. A refilling pay-later limit is revolving credit, so if this is notified as drafted, NBFC Pay Later must change shape or move to banks.

Follow one payment

₹1,200 of groceries on Amazon on 14 June, with Amazon Pay Later lent by Axio:

Earlier, the shopper registered with PAN, Aadhaar OTP and a bureau check, and Axio set a limit inside the ₹60,000 yearly cap for OTP-only KYC.
At checkout the shopper picks a one-month tenure and sees the Key Facts Statement (KFS); a first purchase also sets up the repayment mandate, by net banking or debit card.
Axio funds the order. The loan is in the shopper’s name; the available limit falls by ₹1,200.
On 1 July, Axio totals June’s purchases into one amount due on 5 July, and a reminder follows. This order’s float is 21 days.
On 5 July the mandate debits ₹1,200, the limit is restored, and the loan is reported to the credit bureaus.
If the debit fails and the shopper does not pay, Axio’s late fee starts on 7 July: ₹300 for a due between ₹1,000 and ₹2,500, a quarter of this bill. IDFC FIRST Bank instead charges 3% of the unpaid due, plus tax.
A return before repayment restores the limit; after repayment, the refund reaches the shopper’s bank within seven business days.

Where the money is

Start with the float. At an assumed 12% annual cost of funds, carrying ₹1,200 for 21 days costs about ₹8, or 0.7% of the bill. Money is cheap at this tenor; losses and fraud are not. A pay-later lender can earn in three ways:

Revenue line	Who pays	In India	Affirm, year to June 2026
Merchant fee	The merchant, every order	Simpl’s model; rates not published	$1.15 billion, 27% of revenue
Interest	The shopper, on EMIs or overdue bills	LazyPay: 3.25% a month (39% a year) on a late bill	$2.05 billion, 48%
Late and penal charges	The shopper who misses a date	LazyPay, 15-day cycle: up to ₹50 a day, capped at 25% of principal; Axio: ₹125 to ₹450 on dues of ₹200 to ₹10,000	$0, by policy

Watch the third row. Since January 2024, RBI rules call these “penal charges”, bar interest on them, and say they must not be “a means to generate additional revenue beyond the contracted interest rate.” A ₹300 fee on a ₹1,200 bill sits uneasily with that. A lender that earns on lateness is paid when its customer fails.

Affirm runs the other model at scale: $50.2 billion of Gross Merchandise Volume (GMV) and $4.26 billion of revenue in the year to June 2026, with “$0 in late fees” since its founding. Klarna, which runs a licensed Swedish bank, had $1.04 billion of revenue on $36.6 billion of GMV in the second quarter of 2026, about 90% funded by consumer deposits. No Indian fintech can take deposits; it borrows through an NBFC or rents a bank’s balance sheet.

What is hard, and what I would build next

The hard parts: a second to decide on someone the bureau barely knows, a good customer who is unprofitable unless the merchant pays, and rules moving toward banks and term loans.

1. Pay Later as a monthly term loan. The draft lets a term loan be “disbursed in one or more instalments” if it never refills. A month of Pay Later fits: one pre-approved sanction per cycle, each purchase a drawdown, one repayment on the 5th, and a new one-tap sanction next month, if the RBI agrees. The metric: share of users who accept next month’s sanction.

2. Late fees priced at cost. On small dues, replace flat slabs with an automatic offer to turn a missed bill into a short EMI at the disclosed rate: the shopper pays for time, not for failing. Track penal charges as a share of revenue (Affirm’s is zero) against 30-day delinquency.

3. Bank line, fintech front end. With UPI credit limited to banks and revolving credit likely closing to most NBFCs, what survives is a bank holding the line and a fintech as LSP for checkout, data and collections. The DLG cap sets the deal: the fintech carries losses up to 5% of disbursals and the bank the rest, so price the partnership on expected loss.