How BNPL 2.0 Is Changing The B2B Commerce Dynamics?
B2B transactions is a very large space, running into $100+ trillion in value globally. Every day multiple businesses, small and large, transact for purchase of goods and services.
Buy now, pay later or BNPL as it is mostly called has become one of the most talked about topic in the Fintech space and aptly so - right from Square’s $29 Billion acquisition of Afterpay to the plethora of VCs backing BNPL companies globally, companies across Southeast Asia, Europe, Latin America have all gained momentum when it comes to offering BNPL to their customers. Especially post-COVID, the adoption of instant credit in the form of BNPL has helped millions of people worldwide to successfully shop online. While the debate about whether a Credit Card is a better product or not may go on, it’s worth noting that BNPL is here to stay
Understanding BNPL - Payments plus Credit
BNPL is an exciting intersection of both a payment and a credit product. Buy now, pay later; as the name suggests, is the core feature of the product - the “buy now” part reflecting a transaction for which a payment is made (which in most cases is by the lender or credit provider for the BNPL) and the “pay later” part reflecting the credit/lending nature of the instrument
Time and again, consumers globally have used a BNPL product to make purchases where the BNPL provider/lender pays the merchant on their behalf (the loan, as it can be called, is paid directly to the beneficiary merchant) and repaid back the same to the BNPL provider/lender within a certain period as agreed. E-commerce has seen a major growth, due to the increasing adoption of a real-time, instantly available BNPL product which Consumers can apply and use. However, there is a strong use case for a similar offering in the B2B space - where there are similar transactions happening between two businesses or SMEs, and a payments-cum-credit product would definitely ease the same
Overall B2B Payments and B2B Commerce Space
B2B transactions is a very large space, running into $100+ trillion in value globally. Every day multiple businesses, small and large, transact for purchase of goods and services. These transactions are typically executed post a formal agreement between both the parties/entities around the terms of the transaction, including commercials or pricing for the goods or services. The transaction typically consists of an Invoice being generated by the entity providing the goods (or services) to the entity purchasing (or procuring) the same. This Invoice is then paid in a certain period of time to complete the transaction, depending on the receipt of the intended goods (or services)
This can be understood in simpler terms when one looks at the B2B Commerce space. A retailer, looking to source inventory/goods, reaches out to a distributor, selects the goods, makes the payment and receives the order delivery at their premise. These kinds of transactions, which have originally happened in the offline world, have now become digitized with the coming of several digital B2B marketplaces, aggregators and platforms. Smaller businesses visit these B2B marketplaces and make their regular purchases. The share of digital B2B in the overall B2B Commerce is still in low single digits but it is growing at a rapid pace, especially post Covid, which left many SMEs with limited options for physical sourcing of their goods and introducing them to the flexible and convenient world of Digital B2B Commerce
B2B Commerce and Credit - Strong Relationship
As more and more SMEs go digital for their B2B purchases, there is a need to streamline their experience in completing the transaction. One of the critical parts of these B2B transactions is the payment and checkout experience. B2B payments on B2B Commerce platforms and marketplaces are still evolving. While UPI has changed the dynamics of P2P and P2M payments in India, B2B payments are more complicated, owing to the inherent complexity in the transaction. On top of that, SMEs and Retailers have traditionally been able to build strong relationships with their suppliers over time and have enjoyed certain credit terms or payment terms whenever they carry out a transaction. Most of the payments by an SME to their supplier are not made instantly but on a deferred basis. This is especially important since this has a direct bearing on the working capital management of the SME
Imagine a retailer buying goods from a distributor and being asked to pay upfront for all their purchases, even though the goods may take a certain time (say a couple of weeks) to be sold from their shelves. This puts a lot of pressure in terms of capital requirements for the SME/Retailer. Also, consider the fact that the same SME wants to increase their business and thus need to buy 1.2X or 1.5X of their usual purchase but are unable to do so since they do not have access to capital. Thus, it is very important that B2B Commerce transactions have the support of credit on a regular basis which would enable SMEs to transact and grow their business without worrying about liquidity issues. And for digital B2B Commerce players and Marketplaces, Credit is a key pillar in their overall business growth, apart from Product, Pricing, Assortment, Quality, Service and Logistics/Supply Chain
Why Consumer BNPL Products (BNPL 1.0) do not work for SMEs
SMEs making purchases on B2B Marketplaces require upfront credit to get the goods delivered and then can repay in a finite period of time. Buy now, pay later or BNPL fits into the scheme of things perfectly here and can solve their recurring cash flow issues. However, there are some important considerations to keep in mind when thinking about BNPL for B2B Commerce or B2B transactions and a Consumer BNPL product or BNPL 1.0 may not fit.
Consumer BNPL products are mostly characterized by a limit-based exposure, determined by assessment of the borrower once at the time of onboarding. These limits are determined using a combination of credit bureau, income and alternate data. Most Consumer BNPL products (with significant ticket sizes) are EMI based, where a purchase transaction is converted to EMIs. SME BNPL requires a far more flexible approach owing to the nature of their business
BNPL 2.0 for B2B Commerce and B2B Payments
For B2B BNPL viz. BNPL 2.0, it is important that product is built on the principles of Cash Flow based Underwriting, where no Financial or Income data is collected from the SME and the decision is done purely based on their historical transaction history with their supplier or the B2B Marketplace in this case. Also, considering the volatile nature of SMEs, there is a need that BNPL comes with no EMIs and gives complete flexibility to the SME in terms of repayment. Hence, the repayment terms need to be designed based on the sector that business is present in. For instance, we at Rupifi provide 14-day BNPF (Buy Now, Pay Flexibly) product to FMCG/Kirana Stores but a 45-day BNPF product to Electronics/Mobile Phone Retailers. The same enables us to price it around respective industry margins and expected volatilities in the industries, which has a bearing on expected payment risks.
Initial Traction and the Future of SME BNPL
Indian SMEs have seen tough past 1.5 years post-COVID, and SME BNPL can help them manage their capital better when they need it the most. With a focus on the long tail of Indian SMEs, BNPL 2.0 can be provided to even those requiring ticket sizes as low as Rs. 10,000 in terms of monthly credit limit and transactions as low as Rs. 100 for their purchases. With B2B Commerce getting digitized at an unprecedented pace in India, we have witnessed SME BNPF volumes increasing by 200% MoM over the past quarter. While these are just the initial days, we are confident that with lack of access to formal credit in our country, SMEs can definitely power their business growth through BNPL2.0
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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