Where Credit’s Due Ep. 9: How B2B BNPL works, with Codat and Playter

In today's episode, we're talking about Buy Now, Pay Later. No, not the consumer version that first comes to mind – we're diving into the B2B version.

While B2C BNPL continues to dominate the headlines, its less talked about cousin in the more significant B2B world is just starting to get the spotlight.

An increasing number of businesses are transacting online, but the payment rails still disappoint many times. And given the shake-up in supply chains, companies could truly benefit from a product that can help them navigate cash flow problems. 

This is what B2B BNPL aims to do – bringing the latest digital tools to age-old methods of business-to-business transactions.

I'm talking about this today with my guests Jamie Beaumont, CEO at Playter, a B2B BNPL fintech based in the UK, and Yasamin Karimi, Head of Product at Codat.

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The following excerpts have been edited for clarity.

What's your overview of the B2B BNPL market right now? What's the opportunity here for the business side?

Jamie Beaumont: It's a very different opportunity, actually, from the consumer side. And obviously, the consumer side has got a bit of a bad rap at the moment, but it's still expanding. When we look at it, the B2B market is actually vastly larger than the consumer market for Buy Now, Pay Later, so there's a huge opportunity.

But in our eyes, it's actually split into two separate markets. You've got the marketplace version of checkout Buy Now, Pay Later for the B2B world. And you have what we are, which is a kind of post-purchase offline checkout that deals with helping businesses split invoices that they've received, and it's a huge market. 

When you look at the UK alone, SMEs spend over a trillion, and so the B2B market gives the opportunity for a much bigger spend for each invoice that gets split or each checkout that goes through and allows businesses to have more information from accounting systems and accurate data and just start lending to businesses that right now are completely underserved.

Yasamin Karimi: I think that it's best to describe it as kind of a very known concept when it comes to B2B and small businesses in general. BNPL is actually something that's been around for quite some time as a concept through trade finance, and businesses aren't familiar with this concept of needing access to finance in order to pay their suppliers or access goods and services to basically grow their business or survive. So I think that positioning it in the same bucket as B2C BNPL can be somewhat confusing.

I also think that on the consumer side, it is a lot less complex, a lot easier, from an experience perspective, particularly on the underwriting side, which is where we come in – how to use key data today to underwrite those businesses. 

So as a concept, basically, not new at all, but for businesses, for consumers, newer concepts, but I definitely don't think the two should be bucketed together.

What sort of cash flow pain points can B2B BNPL help SMBs with?

Jamie Beaumont: I think, firstly, because you work in the B2B world, you kind of start connecting with businesses in lots of different industries. There are a ton of issues in different industries, we know that the venture-backed types of businesses, as they scale, they take on larger expenses, and that prohibits their future scale, so there's a lot of issues that we can solve.

B2C is actually quite simple, it's a very easy customer journey. With B2B, there isn't as much volume, but the value is much larger. If you go on to Klarna and buy some jeans for 30 quid and you end up paying 10 quid a month, whereas our average invoice is around 15,000 pounds at the moment, and we are able to underwrite for that through Codat. But the issues that we're solving go all the way from cash flow, from growth, to taking advantage of discounts, because people can split the cost of things, but still get upfront discounts from software houses. There's just too many issues that businesses face that we can help solve, but it is a far more complex mechanism than it is in the B2C world, so we need to be really specific on how we underwrite.

Yasamin, could you give us a little bit of an overview on the underwriting part of it, maybe also a bit of an insight on this narrative that BNPL is not lending. What do you think about all this when it comes to underwriting?

Yasamin Karimi: We work with a number of Buy Now, Pay Later providers to basically facilitate the flow of data between them and their customers. So, for example, we enable them to automatically collect financial statements digitally for underwriting, which will allow the BNPL provider who's offering finance to those businesses at point of sale, to basically say, 'Okay, you want to connect, you want to be able to access this finance, therefore, we need to underwrite you'. We're going to use Codat to be able to get those financial statements from your accounting software, or get your sales data from your e-commerce account or get your bank account data from your bank account. We're basically providing that data mechanism to our clients, those BNPL providers. 

In terms of where BNPL sits, I don't actually bucket it that differently than the way other lenders use our platform. If we're talking about it in high-level terms, it's all about being able to get data to underwrite, and I think the main difference really is the experience side, so it's about where you are offering that business that credit. With BNPL, what you're able to do is deeply embedded into the checkout experience, at the right point in time, rather than rely on a business kind of organically coming to you as another type of lender and trying to secure that finance.

Jamie Beaumont: By the way, it is lending. For instance, why are the B2C players getting a bad rap? Well, they're getting a bad rap because what we're doing is giving a great tool for people to put themselves into debt, right? Everyone thinks it's a very easy checkout mechanism, but they're borrowing money at the end of the day, and they have to pay it back. The smallest mispayment can mean that you get a black flag on your credit rating, and you might not be able to get a mortgage. And people tend to be uneducated within a consumer world, which is why they should be protected, and why the FCA are looking into it. 

Within the B2B world, it's important for businesses to be more educated, but at the end of the day, consumers run businesses, the directors are consumers, and they need to be educated. We need to make sure we understand how much they can afford to borrow, and that we don't enhance the experience so much that they're starting to spend when they shouldn't be spending. This is the big gripe everyone has with Buy Now, Pay Later. 

This is not a new concept invented last year, this is something that's been around – we use technology to our advantage, our flows are 1,000% better than the old ones, we use very different mechanisms such as subscriptions, but when people draw down, they have to pay it back, so it's important that we do actually bucket Buy Now, Pay Later as borrowing and lending.

What is the educational part that needs to happen here for small businesses when they engage in some sort of financing such as B2B BNPL?

Jamie Beaumont: Generally speaking, SMBs are underserved, because credit bureaus, first of all, don't know how to rate them. SMBs are not used to actually being told that they can borrow, and therefore what the appropriate amount of borrow is and what the reasons for borrowing are. A lot of it is because they're just grossly underserved by the banks. 

Now, you have a whole new age of alternative finance for small businesses, whether that's revenue-based financing, whether it's kind of SaaS, invoice factoring, such as Pipe all the way to Buy Now, Pay Later checkouts like Billy. The education piece is purely just around how this type of funding or how the funding that you help businesses get, how it helps that business and how it helps their business move forward, not stifling them under a load of debt that they can't pay back. That's why our live underwriting data comes from open banking and from attaching to accounting systems, so we can educate each individual business on their own scenario, and then how they can use it to their benefit, but absolutely making sure that it's not the opposite way round that you put them under too much debt pressure, in which case the business obviously folds and it's bad for each party.

Yasamin Karimi: I think that actually very much depends on the lender's risk appetite, and what we see is that it varies greatly. We do want to make the experience really, really seamless, but you don't want to make it so seamless that the business doesn't actually know what they're getting into. That would be the opposite of what we're trying to achieve. I think that's the way that the user experience essentially introduces, I don't wanna say a barrier, but a step to help with the consideration that they're about to actually secure a finance product. This is the terms of that finance agreement, because we've been able to get the data from your accounting software, we've run that through our internal risk models, and we've spat out whatever the decision is.

I think, in terms of educating that business, actually getting them to physically do an act like connecting their data is a key part of enabling them to understand that you are providing access to your data to secure the service, rather than if you can pair it to the consumer side, which is very, very different. The experience is so seamless that it's almost like I didn't even realize I've just committed myself to getting access to credit. Actually, as Jamie alluded to, something can go quite wrong with that, right? If I miss a payment, then I may not be able to get that it may be as serious as not being able to get a mortgage in the future.

I think actually, for the B2B side, introducing that very necessary step to connect the data is a really, really easy way to get them to understand that you're about to enter into this credit agreement.

In terms of risk models, it really does vary depending on the lender, and what stage that lender is in. What we're seeing is the rising appetite for businesses to secure alternative methods of finance, as Jamie kind of alluded to, there's obviously different types of finance, BNPL being just one of a whole bucket.  

Businesses are open to securing different forms of finance, but also that lenders are open to using alternative methods of underwriting, meaning getting different types of data to basically build out really bespoke risk models that allow them to extend those credit agreements to businesses who previously couldn't get credit agreements from the likes of banks or legacy lenders.