Buy now pay later, credit card spending reducing savings of youth: RBI Deputy Governor

The “buy now, pay later” (BNPL) schemes and the credit card spending facilitate immediate consumption and reduce the savings of the younger generations, said Michael Debabrata Patra, Deputy Governor, Reserve Bank of India.

He also noted that these trends facilitate immediate consumption but reduce savings, posing new challenges for monetary and regulatory policy formulation.

Speaking at the Maldives Monetary Authority (MMA) Research Conference in Male, Maldives, Patra emphasized how these newer financial technologies are reshaping consumer behavior and impacting the effectiveness of traditional economic policies.

He said, “There is evidence to suggest that the buy-now-pay-later and credit card-based spending can facilitate immediate consumption, especially for younger generations and lower their savings”

He identified several key challenges stemming from the rapid adoption of digital financial solutions. First, the shift away from traditional savings methods could weaken the transmission of monetary policy impulses to the real economy. This makes it harder for central banks to regulate and stabilize economic activities effectively.

Second, Patra warned of the risks of debt escalation at the household level, as easier access to credit can lead to financial stress for individuals. He also raised concerns about the potential for financial mismanagement due to low levels of digital financial literacy, which could lead to the mis-selling of financial products to households.To address these challenges, Patra suggested that central banks and policymakers must evolve their approaches.He stated, “These shifts in consumer behaviour may require central banks and policymakers to transition from traditional macroeconomic models to agent-based modelling, integration of behavioural economics, nowcasting, policy simulations and advanced liquidity stress tests.”

He also highlighted the growing significance of the global digital economy, which already accounts for over 15 per cent of global GDP. He pointed out that generative artificial intelligence (Gen-AI) alone is expected to boost global GDP by USD 7-10 trillion within the next three years.

This calls for evolving empirical research methodologies to understand and assess the implications of these rapid changes. Patra’s insights highlight the critical need for central banks to adapt to emerging financial technologies and their far-reaching impacts on economies worldwide.