Table of contents
Buy-now, pay-later (BNPL) has emerged as a preferred method of payment for e-commerce transactions, and is expected to form 9% of e-commerce spending on B2C transactions by 2023. While it has found tremendous success in the B2C space, BNPL also holds the potential to optimise traditional processes of B2B purchasing for online portals.
From production and distribution to payments - all aspects of B2C e-commerce have developed immensely over the past few years. Now, B2B businesses are catching up. For instance, Buy-now, pay-later for small businesses can now be used in a number of ways by online B2B portals to enhance their purchasing experience.
Automates Trade Credit
The key to the success of BNPL in B2B portals lies in the fact that it provides the framework within which trade credit can be obtained online with ease. Trade credit is as old as business itself – it is required to maintain inventory, manage cash flow and carry out day-to-day business operations. However, it is not easy to secure.
Even though India has a large MSME presence, there exists a vast credit gap in this space. According to a World Bank estimate, MSMEs in India are reeling from a $380 billion credit gap. Institutional banks hesitate from extending credit to these businesses for a number of reasons.
· There is a dearth of information about these businesses because most of their transactions take place in cash. In contrast, big businesses maintain clear accounts of their transactions and assets.
· Small businesses have a history of outstanding credit. In 2016, 4,80,280 MSMEs in India had an outstanding credit of Rs 326.74 billion. The sector is volatile due to market fluctuations and struggles with a lack of assets and capital.
Small businesses have found a solution to this problem through informal credit. They avail of such credit in various forms – they may borrow cash from trusted acquaintances, or buy their supplies from a network of distributors and defer payment. BNPL seeks to disrupt precisely this.
B2B online portals can integrate the BNPL payment option to provide a seamless, in-app financing option at point of sale. In the B2C context, this simply allows consumers to pay for a product in smaller, often interest-free installments. But B2B portals repurpose BNPL as a credit offering. It functions just as informal credit in traditional business workflows, but with a key difference – BNPL automates and digitises credit repayments.
Embedded Finance is the integration of financial services in a traditionally non-financial portal. FinBox offers full-stack APIs and SDKs to small businesses for embedding credit products like BNPL into their app.
Embedded finance solves the problem of long turnaround time and tedious loan approval process by providing easy credit within the merchant’s app itself.
It frees merchants dependent on factoring from having to wait till the factoring provider approves the invoice.
A buyer can place an order for the goods and get credit without leaving the merchant’s platform.
Provides Alternative Underwriting
Of India's 75 million MSMEs, only 16% have access to formal credit. A recurring pattern ensures that MSMEs are excluded from the formal credit ecosystem -
A business approaches a bank for a loan but is refused owing to a lack of collateral or other reasons. As a result, there is no record of the borrower’s creditworthiness with any credit rating agencies. The same borrower finds it difficult to secure a future loan because banks hesitate to lend to applicants without a credit profile.
The credit profile of a borrower is informed by their previous credit activity – past and outstanding loans, how they were repaid, and other factors. But the measurement of a borrower’s creditworthiness by traditional credit rating agencies is based on a myopic approach.
Companies offering the integration of BNPL into merchant platforms have their own alternative underwriting techniques. FinBox relies on alternative data obtained consensually from an applicant’s smartphone to determine their alternative credit score. For instance, data like SMS that points towards the borrower’s income, balance and cash flow are used to create a more comprehensive credit profile. Based on such profiles, sellers can increase the number of customers.
Boosts Customer Retention
BNPL provides a number of other solutions and benefits to not only B2B businesses, but also their customers. Some of the defining features of BNPL like seamlessness and flexibility help businesses retain their customers this way—
· BNPL allows flexibility in repayment of the loan amount so that businesses can easily address unpredictable working capital needs.
· Integrated in-app, BNPL gives buyers a seamless experience. Its use has led to an increase in customer loyalty and conversion rates by 30%. This seamless experience is of importance for B2B businesses because orders are placed in a larger volume and higher frequency.
· The use of BNPL solves problems of liquidity and increases the average order value (AOV), conversion rates, gross merchandise value (GMV) and customer lifetime value (CLTV). B2B businesses can also predict the orders incoming on the basis of their prior transaction history.
The Final Word
Several pioneers in the BNPL space such as Klarna and Affirm, which started with providing B2C BNPL, are now expanding operations to provide solutions for B2B payments as well. These companies are contributing to the discovery of new applications of BNPL in B2B platforms. This is proof that Buy-Now, Pay-Later potentially has as many use cases in B2B businesses as it does in B2C transactions.