Table of contents
Driven by the pandemic and widespread financial instability, buy-now, pay-later (BNPL) is becoming an increasingly popular payment method in e-commerce. It is estimated that BNPL transactions will account for 3% of the total expenditure on e-commerce by 2023. Now, B2B platforms are taking cues from this growth to recreate similar point of sale financing for online transactions made by small businesses. The B2B transaction market is projected to grow to $63,084 billion by 2026.
How BNPL works
Buy-now, pay-later is a financing option usually made available to customers at the point of sale. As its name suggests, BNPL allows customers to pay for their purchase at a later point. In doing so, it works as short-term credit. Customers choose the BNPL payment option at checkout after which their credit profile is evaluated. If approved, the customer makes a portion of the payment immediately and the rest over the coming months.
Interestingly, B2B businesses are no strangers to such a payment method. Small businesses and MSMEs have traditionally traded on credit, often informal. Buy-now, pay-later, as it is used in the context of e-commerce, can help entrepreneurs and small businesses seek formal credit online.
Cash flow problems and use of credit
In a survey conducted by the All India Manufacturers Organisation (AIMO), 66% of the respondents said that cash flow was a major problem in the early months of the COVID-19-induced lockdown. They cited their inability to pay wages and non-payment of bills from customers as reasons. A similar sentiment was echoed in the results of an International Labour Organisation (ILO) survey that found that close to 9 out of 10 SMEs were experiencing shortage in cash flow during the pandemic last year.
Cash flow forms the lifeblood of a small business. Cash flow is considered to be negative when non-payment of bills saps the inflow of money. Businesses struggling with negative cash flows rely heavily on formal and informal credit. But as necessary as credit is to a business, it is not easy to come by.
Problems with Current Lending System
India's MSME sector is home to nearly 75 million business operations that contribute to about a third of the GDP and provide employment to more than 110 million people. Of these, a meagre 16% have access to formal credit. Reasons for this abysmal credit penetration in the small business ecosystem abound:
Institutional lenders and banks may view MSMEs as high-risk borrowers because of a lack of capital and assets, the sector's volatility in response to economic fluctuations, and prior evidence of bad loans. Per RBI estimates, 4,80,280 MSMEs had an outstanding credit of Rs 326.74 billion in 2016. Moreover, the year-on-year growth in non performing assets (NPA) from June 2018 to June 2019 was 12% for MSMEs and 10.8% for larger companies.
Compared to large corporations, little information is available to lenders on MSMEs. MSME transactions frequently take place in cash and circumvent any documentation.
Small businesses are excluded from the formal credit ecosystem because they cannot avail of loans due to insufficient collateral or information. As a result, their creditworthiness is not recorded by credit rating agencies. This becomes a vicious circle as the lack of data on previous credit hygiene dissuades lenders from giving loans to such businesses yet again.
When spurned by banks, MSMEs turn to informal credit sources to tackle their cash flow problems. Through in-person sales, small businesses have successfully built networks of informal lenders such as local distributors with whom they routinely conduct business. Such associations are based on mutual trust, but often involve some offline informal bookkeeping.
Informal credit boosts the business cash flow significantly but its availability is severely limited. These sources can only provide small-ticket credit in the form of deferred payments. Only revolving credit that is seamlessly and readily available can solve the problem of recurring cash flow needs.
How BNPL Helps MSME Borrowers
According to the World Bank, the credit gap for MSMEs in India stands at $380 billion. Buy-now, pay-later for small businesses offers promising solutions in order to close this chasm
When a business pays for an online transaction through BNPL, they can repay the amount over a flexible schedule. Quickly moving funds help businesses navigate unpredictable demand and working capital needs. BNPL payments also provide in-context credit which proves useful when businesses place large volumes of orders that are recurring in nature. Compared to credit cards, the BNPL method also has a smoother approval process.
Use of alternative data
For small businesses who routinely suffer from a lack of formal credit, BNPL provides an alternative form of credit. Institutionalised lenders hesitate from giving credit to MSMEs that have poor credit score or no prior record of lending. BNPL comes as a form of alternative credit that MSMEs can avail of if they do not qualify for formal credit. Such credit is underwritten using data secured from alternative sources such as SMS.
Integration and Embedded Finance
Integrating the BNPL payment option on a merchant platform marks a decisive shift to digital transactions. But this need not lead to disruptions. BNPL and other credit line-powered products can now be embedded on a merchant website seamlessly. This lends veracity to the platform with trusted scoring and underwriting models that use alternative data.
Embedded Finance, or the integration of banking services into a non-financial platform, is leading the charge in fusing merchant platforms with BNPL. It enables merchants to offer credit in-app based on previous customer behaviour. With FinBox, merchants can integrate credit offerings like BNPL into their platforms through easy-to-use SDKs and APIs. It offers -
A rounded in-app lending experience, complete with application, withdrawal and repayment
Higher approval rates, with credit being sanctioned instantly
Flexible repayment, either in the form of bullet repayment or monthly installments
Tailored credit products from a diverse lender network
For B2B merchants, only a digital migration will open the doors for BNPL. This poses the challenge of repurposing traditional workflows like price negotiations and availability of customisable orders for e-commerce. However, FinTech companies are rising to the challenge to address these impediments in an easy, seamless manner.