Business-to-business (B2B) payments are one of the world’s most used financial services, and estimates predict global transactions will surpass $111 trillion by 2027, up from $88 trillion in 2022.[1] Where does B2B BNPL fit in?
Current State of BNPL
Business-to-consumer (B2C) BNPL was riding high during 2020 to 2021 as millions of shoppers worldwide used it to finance purchases conveniently. As a result, BNPL accounted for 2.1% of all global e-commerce transactions or $97 billion in 2020, according to a Q3 2021 report from Worldpay.[2]
However, B2C BNPL now faces regulatory scrutiny to protect consumers from debt bubble entanglement. The U.S. and Europe are mulling regulatory oversight to rein in B2C BNPL. Moreover, rising interest rates make credit costs pricey for providers, stagnating the growth of firms heavily focused on B2C BNPL as margins erode.
We saw in the first half of 2022, several B2C BNPL firms had reported considerable losses resulting in steep market capitalization declines. For instance, stock prices fell 93% for Affirm—the loan company that allows consumers to pay off purchases in fixed monthly payments.[3] And analysts slashed the valuation of Klarna, a Swedish fintech with a similar model, by a startling 85%.[4]
Conversely, the B2B BNPL model appears poised for 2023 growth because it facilitates third-party credit and risk-management tools that improve cash-flow flexibility for businesses by accelerating credit approval while mitigating repayment risk.
The total value of the B2B market in Western Europe alone is estimated at over $12 trillion, which is the total addressable market (TAM) for B2B BNPL service providers. And only 6% of this is from digital payments (less than $700 billion).[5]
If you extrapolate this data on a global scale, it identifies a massive market opportunity. As B2B digital payments grow, we expect the B2B BNPL TAM to increase accordingly. Moreover, B2B BNPL profit opportunities are significantly higher than business-to-consumer BNPL because the value of B2B transactions far outweighs low-value B2C transactions.
Benefits of B2B BNPL
B2B BNPL is on the rise based on its potential to scale and its advantages for buyers and sellers. So, what’s driving the benefits? First, buyers can conveniently repay in installments exceeding standard terms, while sellers receive payment upfront, which previously might have taken 30 to 90 days. And second, BNPL increases sellers’ average order value and improves sales conversion rates. Seller risk also goes down because third parties handle credit evaluation.
Historically, the BNPL market has been advantageous for incumbents, but now new-age players are catching up.
Traditional banks have regulatory expertise and access to low-cost capital. Additionally, they have customer data that can simplify credit evaluation. Yet fintechs can streamline onboarding, underwriting, and payment complexities for businesses. The result? Fintechs now hold a 10-15% share of the supply chain finance market.[6] And bolstered by open banking and investor funding, they can leverage data to extend B2B-focused loans at lower rates than incumbents.
For example, San Francisco-based Plastiq— a service that lets individuals and businesses use debit or credit cards to pay vendors that don’t otherwise accept those payment methods—deploys risk models to determine payback periods. They also provide embedded finance options at the point-of-sale.
Further, small- and medium-sized businesses (SMBs) show high potential for BNPL because this segment’s typical 40% financing rejection rate has sparked a pent-up need for alternative solutions. The short-term credit industry remains dominated by incumbents. However, we expect several more fintechs will turn to B2B payments to improve their unit economics. Moreover, with 70% of SMEs accelerating digital technologies after COVID-19, B2B BNPL solutions promise real-time credit. In addition, SMEs can recycle working capital, easing their liquidity crunch.
Banks realize they must offer B2B BNPL products to stay in the game. Therefore, incumbents and fintechs are partnering to leverage all aspects of the B2B BNPL trend.
For instance, Deutsche Bank and Credi2, an Austrian provider of and operator of digital financing solutions, launched a white-label BNPL solution for e-commerce merchants in Germany. Similarly, Berlin-based Raisin Bank, a savings and investment marketplace that connects retail customers with firms looking to expand deposit reach, collaborated with German B2B payment fintech Mondu. In early 2023, Santander CIB launched its B2B BNPL for corporates.[7]
The most significant benefit for banks stemming from B2B BNPL is that it successfully drives low-cost business-client acquisition and generates retention and loyalty by enabling superior customer experience. Firms should be cautious and monitor and mitigate risks. They need to underwrite various businesses and identity theft, which requires more effective risk management and fraud analysis tools than those in the consumer market. Not many countries have strict regulatory frameworks for B2B payments yet, meaning that B2B BNPL will continue to ride the growth wave in 2023 and beyond.
[1] Juniper Research, “B2B PAYMENTS TO EXCEED $111 TRILLION TRANSACTIONS GLOBALLY IN 2027, AS BUSINESSES ACCELERATE PAYMENTS AUTOMATION TO REDUCE COSTS;” October 31, 2022.
[2] CNBC, “How buy now, pay later became a $100 billion industry;” September 21, 2021
[3] Forbes, “Stock Down 93%, Affirm’s BNPL Model Suffers As Funding Costs Rise;” June 22, 2022.
[4] Ibid.
[5] Business Wire, “Fintech Hokodo Raises $12.5 Million in Series A Funding, Enabling B2B Merchants to Offer Instant Payment Terms and Scale With Confidence;” June 10, 2021.
[6] Finextra, “B2B BNPL: Embedding Banks Within The Supply Chain;” September 15, 2022.
[7] The Paypers, “Santander CIB, Allianz Trade, Two to offer B2B BNPL solution;” January 10, 2023.
