Fintechs today own the growing B2B Buy Now Pay Later space entirely, and control 10-15% of the overall supply chain finance market. It's time for banks to embed themselves deeper in the supply chain.

Fintech-enabled B2B buy now pay later (BNPL) has garnered much attention since last year. Embedded within the payments experience of merchant to merchant transactions, B2B BNPL is collateral-free, short-term credit, that is solving the critical problem of access to supply chain finance, especially for micro, small and medium enterprises (MSMEs).  

The repayment terms that the fintech platforms offer vary vastly across industries, ranging from a fortnight to a year. But the critical underlying innovation of the B2B BNPL is the seamless, completely digital credit-risk assessment model that makes it possible.

Enablers of the B2B BNPL opportunity

The widening trade finance gap is a significant factor in the renewed focus on B2B BNPL. The global trade finance gap reached USD 1.7 trillion in 2020, 10% of global trade volume. This is especially harsh on MSMEs as the financing rejection rates for this segment stand at 40%; a 2017 World Bank study found that about 65 million such businesses are credit constrained. With MSMEs playing an increasingly important role in overall global trade, there is a clear need for alternative and digitally-delivered supply chain finance solutions that can address access and risk modeling for MSME businesses.

In terms of enablers, the accelerated growth in global B2B e-commerce is a strong tailwind for B2B BNPL, with transactions valued at USD 6.9 trillion in 2021. The sector is expected to expand at 18.7% CAGR between 2022 and 2028, touching USD 25.65 trillion by 2028. Rapid adoption of digital tools by SMEs is another powerful enabler. According to OECD’s Global Business Surveys, 70% of SMEs have accelerated their use of digital technologies post-COVID. This fast paced digitalisation of SMEs is helping fintechs roll out alternative credit-assessment models based on access to business data such as buyers’ previous purchases, vintage payments history, cash flow, and other consumer data points.

Exhibit 1 depicts the factors contributing globally to the growing B2B BNPL opportunity, which fintechs entirely own today. Banks traditionally offered supply chain finance products; however, B2B BNPL is not yet their native capability as they lack automated credit decisions and embedded experience capabilities. As of last year, McKinsey reports that fintechs have pulled away annual revenues worth USD 8 to 10 billion from traditional lenders, controlling about 10-15% of the supply chain finance (SCF) market.

In this article, we understand why B2B BNPL succeeds as a product and what are some of the moves banks are making globally to step into this market.

What is fintech-led B2B BNPL solving?

According to a recent Barclays report, 3 out of 5 SMEs currently face late payments on their invoices, leading to cash constraints and weighty issues in the underlying cash flow. Studies further indicate that cash flow challenges kill almost 50% of SMEs within the first five years of inception. The Association of British Recovery Professionals stated, "over a fifth of corporate insolvency is the result of delayed payments for goods and services.”

Several experts have evaluated why traditional supply chain finance (SCF) solutions cannot address this access and risk assessment challenge regarding SMEs. For one, many SCF providers still focus on larger corporates and recurring, big-ticket purchases. It precludes smaller, less well-financed companies from attempting to access such solutions. 

Most SCF solutions are yet to implement innovations like APIs, which could open up access to buyer data and thus enable better risk assessments. This critical step can help make financing options cheaper and more accessible. In many scenarios, less than 50% of the total spend is eligible for financing with traditional risk assessment, with the actual uptake being just 60-70% of this amount. 

Another aspect is that only a few banking and non-banking financial entities currently possess comprehensive SCF expertise and access to in-house processes. This, in turn, restricts access to supply chain finance for businesses with accounts in these institutions.  

Fintechs have understood these challenges. They are focused on solving both access and better credit-risk assessment for businesses by following methods:

• Embedding access to financing options at the point of purchase; for example, US-based Resolve, a B2B spin-off from consumer BNPL provider Affirm, allows merchants to embed ‘net terms invoicing,’ a buy-now-pay-later option as part of their check-out process. Buyers using the option are redirected to the Resolve portal for onboarding or signing in. Resolve assures a ‘quiet credit check’ of the buyers’ creditworthiness within hours.

• Harnessing fintech solutions such as account aggregation, e-tax, and e-invoicing to resolve complexities around onboarding, underwriting, and payments; Berlin-based Billie offers B2B buyers BNPL options for all their business-related expenses. Buyers can create a profile on the Billie Buyers’ portal and track all their expenses and payments. When checking out their purchases at any merchant site that offers the Billie BNPL option, buyers can check out with real-time customer verification.

• Automated and ongoing credit decisions based on access to the buyers’ business and financial data, credit history, payments history, and more; European B2B BNPL provider Hokodo performs a real-time credit and fraud check while the buyers are shopping on the merchant platform. At the check-out, buyers are presented with only the options they are qualified for. 

Another benefit of B2B BNPL is enabling thin-filled SMBs to create better credit profiles as long as they make timely BNPL repayments.

How can banks adopt B2B BNPL?

Banks have natural advantages of access to low-cost capital and the necessary regulatory infrastructure in place when it comes to supply chain finance. Several global banks have taken note of the B2B BNPL disruption, and have entered into partnerships with fintechs or launched their solutions for this space (Exhibit 2).

Deutsche Bank collaborated with fintech Credi2 to launch a white-label BNPL product for online merchants and e-commerce marketplaces in Germany. Raisin Bank, known for its Banking-as-a-Service (BaaS) solutions, is already working with B2B payments major Mondu to provide focused BNPL solutions to B2B merchants, while HSBC has opened up its B2B BNPL APIs in Mainland China. The APIs enable companies to embed the lender’s B2B BNPL offerings on their e-commerce platforms, making credit access faster and more seamless.

Credilinq enables B2B platforms to adopt BNPL capabilities in two models: 

• as a point of payment option embedded in the checkout, and

• as a purchase invoice financing option, available to suppliers keen on accessing immediate payments on purchase orders

In both these cases, it is the underlying credit assessment model that acts as the pivotal enabler. Compared to traditional risk assessment models, Credilinq's credit engine can deliver the following capabilities to banks:

• Automated credit assessment with minimal or zero documentation requirements can help in faster credit disbursal to businesses. Credit assessment depends mainly on direct access to business data like aggregated balances, sales, purchase orders, inventory, receivables, payables, payment history, order delivery status, and many other factors. Credilinq also integrates with accounting systems used by end-user's to get direct access to past and current business data.

• More robust credit assessment than the traditional model, as the engine monitors a more significant number of variables and can perform ongoing assessments on how and when it’ll impact the buyer’s repayment ability.

• Adaptive credit assessment, with changing business performance or stability trends, is reflected as changes in credit limits or repayment terms offered to buyers. It can create optimized models better than traditional and reactive credit assessment models.

• Using usage-based charges, as seen in credit cards, helps businesses process more orders, increasing inventory turnover while controlling overall financing costs.

A B2B pharma marketplace for manufacturers, distributors, and retailers recently partnered with a leading Indian bank to embed our B2B BNPL solution on their platform. This solution allows retailers access to collateral-free credit basis on their cash flow and exclusive benefits from distributors on the platform. It sometimes includes access to 15-day interest-free credit on billing periods and long-duration low-interest rates.   

B2B platforms can embed themselves into the heart of the customer’s trade while enhancing their overall lending play. The product also helps in accessing high-growth, thin-filed borrowers in a low-risk context. Finally, data shows that B2B BNPL has had an exponential growth impact on merchants, delivering several improvements in conversions and order volumes. By becoming a key driver for this growth, banks can position themselves advantageously in an increasingly fragmented market. 

References:

1. https://www.adb.org/news/global-trade-finance-gap-widened-17-trillion-2020
2. https://www.mckinsey.com/industries/financial-services/our-insights/reconceiving-the-global-trade-finance-ecosystem
3. https://www.businesswire.com/news/home/20211203005471/en/The-Global-B2B-E-Commerce-Market-Size-is-Estimated-to-Reach-USD-25.65-Trillion-Expanding-at-a-CAGR-of-18.7-from-2021-to-2028.—ResearchAndMarkets.com
4. https://www.oecd.org/industry/smes/PH-SME-Digitalisation-final.pdf
5. https://www.mckinsey.com/industries/financial-services/our-insights/buy-now-pay-later-five-business-models-to-compete
6. https://www.prove.com/blog/how-fintech-modernizes-sme-supply-chain
7. https://home.barclays/news/press-releases/2022/01/three-in-five-uk-businesses-are-owed-money-from-late-payments–f/
8. https://www.prove.com/blog/how-fintech-modernizes-sme-supply-chain
9. https://www.mckinsey.com/~/media/mckinsey/industries/financial%20services/our%20insights/accelerating%20winds%20of%20change%20in%20global%20payments/chapter-3-supply-chain-finance-a-case-of-convergent-evolution.pdf
10. https://www.pymnts.com/bnpl/2022/deutsche-bank-partners-with-credi2-to-pilot-white-label-bnpl-product/
11. https://www.pymnts.com/news/b2b-payments/2022/today-in-b2b-raisin-bank-teams-mondu-bnpl-tool-small-businesses-need-ecommerce-insurance/
12. https://develop.hsbc.com/api-overview/trade-finance-b2b-buy-now-pay-later