Does B2B BNPL have the potential to emerge as the next top fintech trend?

Buy now, pay later solutions have soared in popularity in recent years, with global consumer-facing BNPL solutions growing tenfold to $132 billion in 2021. The B2B version, however, has been a more silent player.

The proliferation of the B2C model would suggest that it is only natural for businesses to put on their thinking cap and expand this payment option to business buyers – but will it taste the same level of demand and success?

“BNPL is really a catchphrase and more reflective of B2C offerings. The growth of B2B BNPL is directly tied to increases in large merchant e-commerce in the space,” said Aaron Lindstrom, Regional Head of Transformation and Digital Partnerships at global trade credit insurer Allianz Trade, North America.

B2B BNPL works along the lines of business credit – which has been around for as long as there has been writing, or likely longer – and could be better described as trade credit-as-a-service. 

Some companies view business BNPL as a new bottle of old wine – with a new name for what suppliers have long been offering their buyers through trade accounts/trade credit. 

“It’s new branding to what is a very classic industry,” said Ramp’s CEO Eric Glyman, about B2B BNPL, in an interview with Tearsheet.

From an industry perspective, it is the use of a third-party platform or widget to automate the approval of credit from suppliers, distributors, or B2B marketplaces for a buyer that is typically a small business. The buyer gets to pay the purchase price in installments over a certain period, while the seller gets an upfront payment of the total selling price from the buyer’s financier.

Different companies define and deploy BNPL solutions differently, and not all are equal. For example, some business BNPL offerings are similar to the B2C payment frequency, in which payment for goods or services is typically broken up into four payments – with 30, 60, or 90 days to remit payment (net terms or paying on the invoice), while others allow the spreading of payments even longer. 

For business sellers, providing trade credit is a good way to increase sales and grow loyalty, as it enables B2B buyers to better manage their cash flow with more flexible payment options. 

However, there are significant differentiators between BNPL for consumers and businesses. The B2B world is more complex, transactions involve a larger number of stakeholders in a purchase that includes the procurement team, accounts payable department, and budget owner – and each has its own set of unique needs. This means that real-time invoice data must flow and integrate easily with ERP, CRM, accounting, and A/P systems.

“All of this behind-the-scenes “plumbing” must happen seamlessly because business buyers now expect that their purchases are transacted and trackable with the ease and convenience of an uber transaction,” said Brandon Spear, CEO TreviPay, a B2B payments and invoicing network for business trade.

Historically, if a company applied for trade credit for its customer, it would need to complete a paper application and wait a few weeks. However, today’s business buyers expect real-time underwriting and trade credit balance confirmation, as well as the option to check out with trade credit right away.

Why would businesses adopt B2B BNPL?

B2B buyers have long sought BNPL-like solutions – trade credit and payment terms – for their enterprise purchases. While credit cards are the typical default payment method for small to mid-size businesses, research shows that 50% of B2B buyers would prefer a payment option other than a credit card when purchasing for their company.

This means optimizing manual processes and overcoming the challenges of legacy systems and processes, resulting in smooth operation and customer experience.

“B2B retailers and manufacturers must modernize transaction experiences with digital and mobile purchasing options for B2B shoppers, or risk losing them,” said TreviPay’s Spear.

B2C BNPL, like most consumer credit, is focused on giving individuals more ways to buy what they want, rather than what they need. Contrarily, B2B BNPL is focused on required business inputs and is viewed more as the automation of existing credit processes with slight innovation. 

On the other hand, small businesses tend to be most interested in a business BNPL solution that gives them additional working capital to enable them to extend trade credit to their business buyers.

Besides accessibility and cash flow advantages to help new startups get off the ground, credit provider companies also enjoy other benefits such as risk mitigation via insurance or pre-funding, outsourcing collections/dunning services, and a decrease in administrative costs.

Not a cakewalk

B2B BNPL brings its own set of challenges. Understanding its risks means realizing that many of the buyers in the space actually began their purchasing decision with an expectation to pay at checkout rather than an expectation of net terms. 

A seller’s buyer identification and credit decisioning mechanism need to be easy, accurate, and immediate. Too much friction in the process will lead to cart abandonment and lost sales opportunities, while too little accuracy will lead to high losses through fraud or poor credit decisions. These risks are not new to the trade credit industry, but the speed at which they're assessed is a new factor.

Additionally, as a B2B BNPL provider, onboarding and underwriting credit can be a difficult and time-consuming task that takes a provider away from its core business activities.  

Moreover, with increased B2B customers acquired online, there has been a growing risk of B2B identity theft and other forms of digital fraud. Recent research confirms that 98% of B2B businesses have been affected by financial losses due to successful fraud attacks in the last year. 

“Many merchants and BNPL players use our API products to help manage fraud risk and credit risk. Fraud risk is also managed by having integrated services on the actual buying platform that monitors things like email addresses, IP addresses, speed of keystrokes, and other factors that could indicate fraud,” said Allianz Trade’s Lindstrom.

Nevertheless, company identification is easier than user identification. Verification of users can include things like multi-factor authentication, where one must insert a one-time password received via text or email. Open banking data can also be used to verify that the buyer has access to the company bank accounts and other channels. 

Managing fraud and identity theft while capturing all potential sales requires a balancing act. Most organizations use multiple methods to create a variety of user journeys, depending on the number of fraud indicators that a user/merchant presents. A repeat buyer that has paid multiple times via direct debit is less likely to set off a warning than a user from a large corporation using a Gmail address, for example.

In this regard, business suppliers need to strike the right balance to strengthen their relationships with digital buyers: leveraging data to offer instant decisioning and trade credit but maintaining sophisticated fraud detection processes and a strong track record for risk decisioning. 

Since B2B purchases tend to be so large, a single default could be crippling to a supplier. Compared to B2C operations, the obligations companies have in B2B are far more varied, with added legal complexities, and more at stake if businesses miss payments.

Why is the business model more relevant today?

Based on surging demand, B2B BNPL is becoming increasingly important in two main areas, according to Allianz Trade’s Lindstrom.

The first is in marketplace scenarios where buyers and sellers may not even be known to one another. The anonymity of these environments requires some type of trade credit offering that protects the seller from credit or fraud risk because buyers want terms beyond those offered by credit cards and other payment methods. 

The second area is direct merchant sales via e-commerce which is mainly focused on small business buyers. Using an e-commerce trade credit insurance API or BNPL provider allows merchants to sell to large numbers of buyers without the need for manual solutions. 

While bigger buyers may want to negotiate terms and other factors in their buying process, e-commerce buyers want instant decisions that offer competitive payment terms.

However, B2B merchants face competition to win increasingly digital buyers, amplifying the need to offer payment solutions that will drive revenue and support customer loyalty. 

To help build repeat customers, a firm needs to push its B2B buyers to better manage their cash flow with more flexible payment options, intelligent data personalization, omnichannel access, and real-time data – that could create opportunities to target cash-hungry SMBs with short-term funding needs.

“B2B sellers who adopt BNPL offerings can eventually expect growth opportunities in sales, e-commerce cart size, conversion, and loyalty,” said TreviPay’s Spear.