Ongoing Trends to Watch Out for in the B2B Buy-Now-Pay-Later Ecosystem

by Aaron Lindstrom

It’s no secret that Buy Now Pay Later (BNPL) has exploded in the B2C space over the past few years. However, only few have a comprehensive grasp on what it is, its implications, and what we can expect to see in the future. To truly understand the current B2B BNPL landscape, it's crucial to consider the trends in both consumer finance and business credit offerings.

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B2B buy now pay later, explained 

Most of us have seen numerous television and radio ads offering everything from furniture and mattresses to home appliances and exercise equipment on a six-months same-as-cash offering. The accessibility of consumer finance allows people, as individuals, to make large purchases while avoiding high interest payments they might experience carrying balances on credit cards. Now, bring technology into the equation, and the combination of technology and consumer finance yields BNPL. Technology now offers deferred interest free financing to the end consumer at costs similar to credit cards for merchants and drives massive increases in transaction size and customer conversion. Currently, there are very few websites that don’t present consumers with a buffet of payment options at checkout; the more options you offer the consumer, the more likely they are to buy from you. 

In much the same way, B2B BNPL is the marriage of net terms and technology. B2B credit has existed as a concept for at least as long as we have had written records. The idea of providing materials today for an increased return in the future is nothing new. However, onboarding a brand-new customer and offering them hundreds of thousands of dollars in minutes is quite revolutionary. While the B2C space allows consumers to purchase luxury or big-ticket products, B2B BNPL offers buyers deferred payments on the critical inputs to their products and services. Similar to the B2C space, merchants offering multiple payment options are more likely to convert prospects into high value buyers.  

It’s important to note that the B2B landscape involves a much more complicated economic structure than the B2C market, and we are seeing the development of clear specialization in the B2B BNPL ecosystem. For instance, instead of the traditional pay-in-four offering, many B2B BNPL players are focusing on automating traditional net terms on smaller or web-based transactions. Essentially, what BNPL represents in B2B is the offering of net-terms as a service to merchants and buyers alike. Likewise, the B2B space encompasses both on and offline transaction flows. These offerings include e-commerce checkout solutions, long-tail credit solutions, and industry specific marketplace platforms. 

BNPL’s enablement of small and large merchant solutions 

In its early stages, the most obvious recipe for success in BNPL for business transactions was to duplicate the success of B2C solutions by providing a simple and easy payment option at checkout. This strategy has proven effective for merchants who sell both B2B as well as B2C, and it will continue to enable a viable growth vertical. Smaller merchants, often underserved by existing credit markets, receive payment up-front, improving their cash flow and mitigating credit risk. Additionally, BNPL providers often partner with credit insurers to accelerate the onboarding process, reduce fraud, and mitigate buyer risk especially on new customers.  

These checkout solutions have helped lay the groundwork for larger merchant solutions. For large sellers, the long tail of this customer base is often a time intensive and higher risk portfolio. The classic 80/20 rule, or sometimes a similar variation, applies here as the long tail is the large group of buyers that represent a relatively small percentage of overall revenue.  

A partnership that portends the future of the industry 

BNPL partnerships, like the recently announced tri-party partnership between Allianz Trade, Two, and Santander open up low-cost solutions for merchants with long tail portfolios. Large companies have sophisticated and effective credit management processes and lending relationships to allow them to offer net terms to large buyers; the systems become cost intensive when applied to long tail portfolios of thousands of buyers.  

Technology providers like Two streamline credit assessment, buyer onboarding, and cash management for their large merchant clients. Partnering with a bank like Santander gives these technology-first BNPL companies access to balance sheets strong enough to handle the cash demand of large sellers. Adding into the mix a trade credit insurance policy from Allianz Trade mitigates the credit risk for both the merchant and the bank. As such, deploying an automated and low risk solution not only helps large merchants handle the long tail but also makes establishing a robust e-commerce offering quick and easy. This partnership providing long-tail automation drives the e-commerce checkout, increasing the overall value of the solution. We see this segment as potentially the most explosive area of the BNPL landscape, as companies of all sizes can benefit from the automated capabilities and access to capital. 

Current disruption in the B2B BNPL space 

As with the B2C Space, e-commerce has created a variety of B2B marketplaces. Unlike the Amazons and Alibabas of the world, many of these newcomers are industry specific and attempt to solve more pain points than just introducing buyers and sellers. Platforms like Mundi and 40Seas, for example, have identified specific verticals for their solutions. 

Cross-border industries like logistics, agribusiness, and many commodities are great targets for disruption for multiple reasons. Trades in these sectors are typically documentation intensive, can be complicated, and have heavily relied on pre-payment or letters of credit for large transactions. Players in this space not only provide access to new customers and/or suppliers but also greatly simplify the many steps involved in the transaction.  

The BNPL ecosystem continues to evolve as a potentially huge segment in trade finance. Not only are BNPL players creating new solutions but merchants and financial institutions are also responding to the new age of digital payments.  

More traditional financial institutions, like banks and credit card companies, are also becoming more active in the BNPL space. Visa, MasterCard, American Express and new players like Apple Pay and Google Pay are all building their own version of BNPL technology. While much of this has been focused on the B2C segment, the B2B space is garnering more of their attention. If a merchant already accepts credit cards, a card based net-terms program becomes a free option for their buyers. Santander and many other multinational banks are seeing the value of offering BNPL solutions as value added services to their clients. Banks are faced more and more with the decision to build their own programs or partner with a BNPL provider to enter the market. Bank/Fintech partnerships allow all parties involved to handle their areas of expertise with seamless experience for their mutual clients. 

Future trends on the horizon, and associated risks 

Another evolution worth watching in the space is the distinction between buyer-based and supplier-based programs. Buyer-based programs focus on providing unsecured credit line or just-in-time virtual cards with fixed aggregate limits for each buyer the BNPL solution services. These solutions generally have access to more buyer financial data but run an increased risk with supplier side issues. In many cases a merchant may not even be aware a payment has been made from a BNPL solution.  

Many companies in this space also offer highly portable solutions. A merchant using such a solution often has the ability to pay with paper checks, EFT, or credit card options and no merchant integration needs to occur. While customer acquisition may be very rapid in this approach, the nature of unsecured loans potentially exposes BNPL providers to a higher repayment risk from their clients. 

Supplier side programs tend to mirror more traditional trade credit processes rather than loan-based solutions. Merchants may integrate a BNPL solution as a way of offering net terms to new and existing customers or to reduce the impact of net terms on their own cash flow. Supplier side risk is generally lower in these partnerships, so buyer fraud and credit risk become the main concerns. The advent of open banking, one time password (OTP), and other anti-fraud techniques when combined with credit insurance can greatly reduce the buyer side risks for BNPL providers. While the nature of these solutions may carry a lower credit risk, they are generally more technically complex for merchants than a buyer base program. 

All trends point to an increase in the digitization of B2B commerce and payments. Merchants are being forced to adapt or risk losing significant market share. Financial institutions are aggressively exploring the BNPL space and Fintech continues to grow year over year. One of my mentors told me once that the only objection B2B salespeople have heard in the last hundred years is, “I can get it cheaper online.” Tomorrow the objection may very well be, “Your competitor gave me terms on my first visit so I bought from them.” As such, BNPL and net-terms as a service will continue to expand and evolve, and we are excited to be working with so many of the players driving this innovation and shaping its future. 

Aaron Lindstrom is the Regional Head of Transformation and Digital Partnerships for Allianz Trade in North America.