By Nick Parminter
Buy now pay later (BNPL) is well entrenched in the fintech landscape now, with some of the most valuable businesses in the world, Klarna, Affirm and Afterpay flying the flag for the category. Their success can largely be attributed to successful penetration of the consumer market. Even though the SMB credit market is worth half that of the consumer market, it does beg the question, why have so few of the big players made inroads into this segment?
We can whittle it down to three key factors a) higher risk, b) complex payment workflows, c) heterogeneous user needs. Here, we seek to understand the nuances of the B2B BNPL opportunity in comparison to the B2C space. We will provide actionable insights as to how and where businesses can capture value where others have failed, and what we’re likely to see emerging in this space in the near future.
Firstly, let's examine the current backdrop of the BNPL industry which has been hit hard with the recent decline in economic health.
BNPL has experienced huge growth driven in large by the acceleration of the digital economy during the pandemic. This catalyst helped the UK BNPL market quadruple in size in 2020 to £2.7bn with over 5 million users (FCA).
Against the backdrop of an economic recession, we are now seeing those numbers experiencing a reversal. Major players are seeing a squeeze on their valuations due to a fall in online shopping and an increase in non-repayments. Klarna - once the most valuable private company in the world - is cutting 10% of its workforce due to a drop in consumer demand.
Talked about less publicly is that these companies are also likely facing a crisis of ever increasing non-payments. The beauty of this type of credit lies in its accessibility, though this may end up accelerating its demise. It’s claimed little attention is invested in establishing the credit risk of potential borrowers, which in times of prosperity is not an issue. But in times of recession this strategy may come back to haunt them - with 10% of BNPL borrowers already exceeding their overdraft (FCA).
Despite this we’re still seeing money flow into the BNPL B2B space with several notable investment rounds; Mondu $43m, Hodoko $12.5m and Playter $1.7m. The key for its survival is firstly, to ensure close attention paid to the lessons learnt causing fragility in the B2C space. And secondly to recognise the differing market dynamics that must be adhered to. This is not simply a copy and paste job.
B2B e-commerce tends to have a higher average order value of multiple magnitudes. Consequently there’s more inherent risk involved in every transaction. Whilst B2C models typically manage risk on a broader portfolio basis, B2B BNPL firms need to scrutinise individual transactions from both a fraud and a credit risk perspective - so an extensive examination of the borrower is needed at point of sale. We must still ensure the fundamental premise of speed and convenience is delivered to the end user. This type of financing does not work if it takes days or even hours to underwrite.
Open banking is a potential solution. But first we must recognise why so far it has not been a feature behind the success of BNPL B2C players. Simply put, the value exchange is not favourable for the user. Splitting a purchase of a pair of £100 trainers is not worth providing 3rd party access to their transactional data for the vast majority of consumers.
However, for a business the idea of splitting the cost of a £20,000 piece of machinery over six months to manage cash flow is potentially far more attractive as a value exchange for their transactional data. Particularly if the traditional business model of levying the interest fee on the marketplace/merchant, rather than the buyer remains.
If categorised and analysed correctly the granularity of the transactional data can provide a far more accurate and timely snapshot of the creditworthiness of the borrower at the exact time of purchase. This data is fed through an API technically enabling a near instant analysis of the business to occur at checkout - imperative if we are to make the assumption that speed and convenience are a core part of any BNPL solution.
The workflow of any B2B transaction is complex. Negotiation based pricing, complicated payment terms, customised orders and multi-party relationships are commonplace in these marketplaces and as such have to be considered in any trade credit product.
The B2B order-to-cash process is more complex than its B2C counterparts. There are more moving parts involved, more checks and balances. For BNPL to operate efficiently in the B2B sector it has to take these into consideration and navigate between them.
Whilst any unwieldy solution is best avoided, there’s an opportunity here to build a defence moat around B2B offerings. For example a B2B BNPL player may combine their credit product with other SaaS solutions for billing, invoicing and payments. Essentially creating a vertically integrated SaaS solution that can provide all elements of a more complex B2B transaction, not just the finance.
In the B2C world, the BNPL players are focused predominantly on serving the “C”. The borrower. The payment conditions don’t change for the supplier - they get paid as usual, but should benefit from higher conversion rates on online checkouts.
However, in the B2B sector, the condition that the supplier should be paid immediately doesn’t always ring true - they’re often remunerated 30, 60 or even 90 days later. So now we have an environment where both sides of the transaction can benefit from some kind of finance.
Smart BNPL solutions can provide financial solutions to both customer types: the buyer and the supplier. In the case of the buyer the premise is the same in the B2B world - spread the cost of the purchase over a longer period of time to help manage cash flow. In the case of the seller they may want to be paid earlier rather than waiting out their standard payment terms of 30, 60 or 90 days.
Essentially a BNPL provider can artificially increase the time spread between the time the supplier receives the cash - by bringing settlement forward - and the time the buyer has to pay for the product or service - by pushing payment later. The spread increase provides reason for the provider to levy charges on both sides of the equation for helping them both to manage cash flow.
In the short term we will continue to see the growth in the B2B BNPL space. Undoubtedly those that replicate the B2C model will likely experience some degree of short term success due to its familiar nature. But simultaneously we will see the emergence of more hyper-niche players that focus on a particular industry (such as Playter) for spreading the cost of meaty business expenses such as rent, legal fees or recruitment.
Ultimately over the long term, the true winners will be those that find advantages across one or more of these feature sets:
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