Power of Payments Ep. 17: Breaking down B2B BNPL with Resolve’s Chris Tsai

Welcome back to the Power of Payments podcast. I’m your host Ismail Umar, and in today’s episode, I’m joined by Chris Tsai, co-founder and CEO at Resolve.

Resolve is a B2B payments firm that offers a BNPL solution for business purchases. It allows merchants to extend net terms to their business customers by taking care of credit checks, invoice financing, and accounts receivable processes. Resolve spun out of Affirm and is backed by Max Levchin, who co-founded PayPal and Affirm.

In our conversation, Chris talks about how Resolve’s product is different than that of consumer BNPL providers like Affirm and Klarna, how current macroeconomic challenges are affecting firms in the space, and what we can expect from the B2B BNPL sector in the coming years.

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The following excerpts were edited for clarity.

I'm co-founder and CEO at Resolve. Resolve and my personal story intersect with a fairly well-known founder in the fintech space, Max Levchin, who is the co-founder at PayPal, and also co-founder and CEO at Affirm. Max was an angel investor in my last business, which was a preorder payments ecommerce platform. In 2012, I met Max at my Y Combinator Demo Day, where Affirm was just a baby company – they did not have any customers at the time, and it wasn't even called buy now pay later at that point in time. I think they really wanted to experiment with whether or not consumers would go for a lending product in the checkout to help them make purchases. And we happened to have a number of consumer merchants that were using our ecommerce platform, that were very game and willing to try growth tools inside the checkout. So we ended up striking a partnership between my business and ecommerce platform and Affirm. And so, not only did I get to know Max as our angel investor, but his entire early product and go-to-market team. And we ended up being the first ecommerce platform to offer Affirm as a payment method. And the pickup from the merchants and their buyers was pretty incredible. So this was the 2013 timeframe, and we were watching what's now very well-known if you're in consumer ecommerce, that BNPL – the Affirm button – will basically drive something like 30% to 40% lift in conversion and sales. And you know, there's a very powerful effect it has on your business.

So, the short version of the story is that we got so much traction, our merchants got so much traction from Affirm, many of them who also had a B2B or commercial or wholesale component of their business, said this is amazing – why doesn't this exist for my B2B business line? And so, at the time, we were working on this ecommerce platform, it became a pretty interesting insight, we said maybe we should mark that thought for later. We ended up selling our business to a crowdfunding platform, and in the intervening period, my co-founder and I, we were thinking about the next big venture we wanted to build. We ended up reconnecting with Max and mentioning the B2B buy now, pay later concept. Max instantly jumps on it, saying hey, that's an incredible idea. And one thing I forgot to mention is, we ended up giving Affirm probably something like their first 25 to 30 merchants from our platform, as part of that partnership deal we did. So Max said, hey, for B2B BNPL, we’ve got a bunch of our own merchants who are asking for the same thing. I can return you guys the favor. I've been thinking about a sister spin out company – I just need some founders to help me launch or spin that out of Affirm. So it was this match made in heaven. And so, there were a couple dozen merchants that were asking Affirm for something very similar, really focusing on the B2B businesses, specifically the invoice part of the transaction where you think about invoices, the part where a business seller is being asked by their buyers to wait 30, 60, sometimes 90 days to make that invoice payment, so they have to act a bit like a bank to their own business customers. We focused on that. Max and his team gave us a bunch of our early customers, and we spun out in the 2019 timeframe. And now, here we are, working in Resolve. And our B2B BNPL category creation, that's been a big part of our story since the beginning.

As you mentioned, of course there's also been a demand for BNPL among businesses. But why do you think it took so long, or at least much longer than the consumer BNPL firms, for the B2B component to come out, or for this idea to catch on?

Yeah, that's a great question. I think there's a well-understood phenomenon that businesses, given their potentially slower adoption curve and lower sophistication level than early adopter consumers, they just take longer to adopt new technology. And so, the reality is, they're often delayed in the adoption cycle by something like 5 to 10 years. And so that's definitely been the case. So if anything, I would say business buyers on accounts payable teams, or even business sellers that have accounts receivable teams, they have experienced things like consumer buy now pay later, or the ability to seamlessly transact. And they're thinking, hey, I have this old system, my ERP system, or my payment system that was built in the ‘90s or early 2000s, I probably need to upgrade that. How do I find a thing that looks and feels like Affirm? And so, they'll go looking for it, and it might take a while to convince the rest of their team internally to do that. And once they do, you know, you can just imagine how long that process itself takes. It can be a while. So slow adoption, but still the expectations that these individuals that are making decisions for their businesses have, I think largely they have come from the rise of frictionless buy now pay later purchasing in consumer. So I think one probably caused the other – that'd be my way of thinking about it.

As a B2B BNPL offering, how would you say Resolve is different than the major players in the consumer BNPL sector like Affirm and Klarna, both in terms of how it operates and what it offers to its customers?

There's a couple of big differences – one is, as I mentioned, we're really focused on the invoice transaction. And the important thing to understand about invoice transactions, it might sound simple to issue an invoice and wait to get paid for 30ish days or so. But in fact, there's quite a lot of complexity within that business workflow. So as the seller or the issuer of that invoice, there's at least four steps you have to undertake to make that successful as a transaction. So step one, you have to credit check the customer that you're offering the invoice to, especially if you're offering them a delayed payment, which means you're floating them a form of credit. So underwriting them as step one is important. Step two, if you're doing this to a number of customers, you want to enroll them in a program, and often that program component, managing that credit limit, or the credit that's available to that customer, is its own step. Third, after the invoice is sent and issued, you have to go collect or chase that payment, which can be its own process. Oftentimes, businesses don't want to act like a collections agency to their own business customers, in addition to lending to them. And then lastly, there's this whole step around reconciliation, or if there's multiple partial payments to an invoice, it's a lot of work to get those partial payments reconciled into your ledger.

So across these four steps, we have to manage that end-to-end. That's very different from a consumer transaction, where oftentimes there are parallel components, the underwriting step is parallel, and the KYC bits versus the KYB bits in business. But largely speaking, I would say the highest-level difference is, there's much more emphasis on the workflow and business process in the B2B buy now pay later case than in the consumer case. Another way I've heard it put, which I've always found very interesting, is if you equate a consumer transaction to as simple as a tweet of 140 characters, the business transaction is more akin to passing a bill through Congress. There's a lot more complexity involved, as I mentioned, those four steps, and there's often nuance to each of those steps. So, it's really important as a B2B buy now pay later provider to make sure you're not only handling the cash flow components of the transaction, which is what many of the business sellers and buyers want – delayed payment terms – so that there's cash flow benefits. But really, there's a whole host of workflow issues that you have to solve in order to really address the core pain.

Now let's talk a bit more about Resolve’s customers. How would you say the problems of your typical customer, which is a business, are different from the problems of a consumer that uses a B2C BNPL service like Affirm, for example?

Yeah, maybe the best way to get at this is to talk about an example. We work with a number of manufacturers and wholesalers and distributors. So, let's take one of our customers, which is a bike manufacturer that sells to retail bike stores. And during COVID, you can imagine that any outdoor sporting goods or supplies did extremely well. So during this period of high demand for these bikes, our bike manufacturer seller was getting lots and lots of demand from their bike chain customers to make purchases of these multiple batches of bike skews. And they were having difficulty doing so because they're a medium-sized business, they don't have infinite cash or the balance sheet to float these terms. And they have a relatively small accounts receivable team compared to some larger incumbent bike manufacturers.

So long story short, there's a need for them to basically compete with these larger manufacturers with a workflow process and a cash flow demand that they don't currently have available. So they install Resolve at their invoice and checkout. And they're often able to, instead of just working with their top 5 to 10 best business customers which they're offering terms to, they can now offer net 30 terms to basically all their customers that are approved by Resolve for net terms, and therefore able to sell significantly more skews. So if they were only offering in the 25k credit limits for these, like store owners that were making purchases, they could now increase that credit limit to 75k. So 3x the purchasing capacity of their business buyers, and those business buyers who are now stocking these bikes in their showroom floors, not only can get larger batches of inventory to sell, they can often also increase the cycle time for the sell through. So there's a very virtuous cycle.

As I mentioned earlier, in the consumer case, generally there's an increase in the purchasing from the business buyer to the business seller. So that definitely happened in this case. But unlike in consumer, it's not just about the conversion benefit, like the instant checkout. In this case, it's really about unclogging the supply chain, as I mentioned, from the manufacturer to this business retailer, and it's about really increasing the AOV or average order size, and the repeatability of that purchase, especially if there's a recurring nature to that purchase.

I would also like to talk about the current macroeconomic climate. The last few months have been a challenging time for a lot of fintech firms in general, but it seems, even more so for BNPL providers, at least in the B2C space. So I'm wondering how this period has been for Resolve, and for B2B BNPL providers in general.

I would say the net of it has been positive for us, because if you think about what I just mentioned, both business buyers and business sellers have a need for being able to manage their cash more effectively, which is what we help them do, in addition to managing oftentimes constrained workflows. And so the demand from both buyers to have delayed payment terms of 30, 60 or 90 days, is increasing. And therefore, the need for merchants to offer that more effectively has gone up. There is risk, though, obviously – there's slow-pay and no-pay risk that we have to be very mindful of along with our sellers. So, the increased demand for our offering doesn't necessarily mean it's all sunshine and roses, especially in this macroeconomic environment where there's more nervousness. But I would say, relative to the consumer players that have oftentimes much longer duration, risk that they have to think through – in the Affirm case, I know they can offer installment loans of up to five years. Ours tend to be a much shorter duration. So that's more of a difficult position to be in from a structural or capital markets point of view. We're actually, I wouldn't say immune to those effects of having to have large debt and warehouse facilities, but it's less risky for us because we have a shorter duration, and we can turn our capital much more quickly. So yeah, I would say the macroeconomic environment is a net positive for us, but there's definitely still risks.

Recently, there's been a lot of discussion around the CFPB’s report on BNPL firms, which suggests that stricter regulation is coming for the sector. Now, obviously that pertains more to consumer BNPL, but do you think it could also have some sort of impact on B2B BNPL providers like Resolve?

The CFPB and the consumer regulation of buy now pay later is definitely a hot topic. I know that our friends over at Affirm and other consumer buy now pay later players are watching that with great interest, and really wanting to play well with the regulators. I think it's different in B2B for a number of reasons. Loosely speaking, B2B, because these are businesses, not individuals, the regulatory framework for invoice transactions, because what we're doing is not really lending, these are just invoice payments inside a business process or workflow, these are just payment methods, and there may be a credit component involved in it. It's not treated the same way, you don't have the same regulatory requirements, and the individuals, or even the businesses that are making decisions around these business payment methods, whether you're a seller of an invoice or a purchaser of an invoice. These are business payments, and not loans. Therefore, it's going to be probably a lot longer, or it's going to come in a very different flavor, if there is, what you're referring to in the consumer space is like a regulatory oversight set of procedures. I do know that there's attention being paid at the state level to business purchasing and business finance and things like invoice factoring, which is not what we do. But yeah, I would say, the short answer is, it's not gonna be regulated, because it's just a business payment or business payment method. And so, I know there are other flavors of business BNPL that might be more akin to a loan, I think that's probably a little bit more at risk of being regulated. But what we do is less likely to be.

Now, let's look into the future. What's in store for Resolve in the near future, and what can we expect from the B2B BNPL sector in the coming years?

I think the vision we have for the space, because this is really just business as usual between B2B buyers and sellers, is really about managing the very core issues around workflow and cash flow. And so ultimately, buy now pay later may become an outmoded term. It's really about B2B payments. And we think about Resolve not just as a buy now pay later provider, but as a B2B embedded payments platform. And our core mission is to grow transactions into relationships, that's really at the heart of businesses who are doing business with other businesses, individuals interacting with other individuals and expanding their commercial relationships. So, we know that B2B transactions are going to become as frictionless as B2C, we know that the rise of online purchasing and just ecommerce in general is going to make the need to handle business payments in the checkout through your invoicing more and more embedded in nature. So we're really building that future. We love to think of ourselves as the little sister company that eventually goes up and tells their older sibling what to do. Because the market for what we do, and the business transactions, are substantially larger, multiples of size to the consumer equivalent. So we're excited for the future and the large opportunity we have ahead.