The following is a guest post by Galia Beer-Gabel, Partner, Team8.
Over the past few years, a stream of new and innovative Buy Now, Pay Later (BNPL) solutions has piqued the interest of investors who recognize the inherent benefits of more flexible payment terms for buyers.
However, the ripple effects of ongoing macro and geopolitical trends continue to undercut BNPL market momentum, with soaring inflation, recent interest rate hikes, and the rising cost of capital among the litany of challenges confronting BNPL players.
Challenges in the B2C BNPL arena
By offering buyers more flexible payment terms, BNPL encourages consumers to take on more debt they may not be able to repay, an issue being exacerbated in this current economic climate.
In the U.S., Fitch Ratings reported that delinquency rates for BNPL provider Afterpay jumped from 1.7% to 4.1% between June 2021 and March 2022, while the delinquency rates for significant credit cards remained unchanged at around 1.4%.
Current market conditions are contributing to the declining valuations of some of the leading consumer-centric BNPL players, with Affirm’s share price recently hitting a record low following its peak in November 2021.
Related: Soaring inflation could benefit B2B BNPL market
Similarly, Swedish payment firm Klarna Bank AB’s valuation dropped 85% from $46 billion in 2021 to $6.7 billion in 2022.
On top of the global economic downturn, fierce competition is forcing BNPL providers to bid prices down and offer low-cost solutions to retailers on the one hand and to find new revenue streams on the other.
In parallel to the challenges associated with an increasingly competitive landscape, BNPL companies should also expect stricter regulatory oversight, similar to the UK government’s plans to pass BNPL legislation that aims to increase transparency around current industry practices.
Reports suggest the US Consumer Financial Protection Bureau is also planning to introduce a formal regulatory framework.
This could spell the end of customers paying for online purchases in installments without incurring any potential impact on their credit score.
Tighter regulation will be welcomed by those who believe BNPL encourages irresponsible spending. It will also likely be embraced by BNPL customers who have been hit with hidden fees when returning items and the 42% of BNPL users who have incurred late payment penalties.
I think regulation is a must and will help strike a balance between the consumer demand for convenient BNPL offerings and the potential downside impact.
So what’s next for BNPL?
Looking ahead, we’re bound to see new business models akin to Accrue’s SNPL (Save Now Pay Later) solution or Kasheesh, which simply bypasses some of the problems associated with BNPL by enabling users to split payments among different cards. In parallel, BNPL-native companies may need to rely more heavily on strategic partnerships with larger platforms to fuel their growth.
Affirm’s partnership with Amazon last year is a good benchmark example. Others, like AfterPay and Klarna, have embraced the SuperApp model and expanded their financial and commerce product offerings, primarily to go beyond the merchant and form a connection directly with the consumer.
However, with the threat of a recession and the growing cost of capital, I suspect we will see big players reduce their risk appetite and start to focus much more on operational efficiency.
Finally, and in alignment with a broader fintech trend, I expect to see a steady rise in more verticalized and industry-specific solutions tailored to specific use cases.
Teller is focused on BNPL for NFTs, PayZen is spearheading BNPL for healthcare, Jetty has set its sights on BNPL for rent, and more are on the way.
BNPL enters the B2B era
BNPL solutions developed specifically for the B2B space represent a real game-changing addition to the broader BNPL ecosystem. It is predicted that the market for BNPL in B2B transactions in Europe and the U.S. will reach $200 billion over the next few years, in contrast to slowing growth in B2C BNPL. Investors are taking note – Hokodo, a UK-based B2B BNPL firm, recently secured $40 million in funding.
In comparison, earlier this year, Italian platform Scalapay and Germany’s Billie received valuations of $1 billion and $640 million, respectively. BNPL services are proving especially popular with small and medium-sized enterprises, whose bottom lines are being shredded by record inflation, rising loan rates, and capital market volatility.
Klarna-backed Playter – an SME-focused BNPL provider – raised $55 million in funding this year, and there is massive potential for more SME-centric BNPL solutions to take off.
To unlock the promise of the B2B BNPL space, we must review the key differentiators that distinguish it from the B2C realm.
For example, in the B2B arena, the digital experience in a typical transaction is much lower, the volume of business transactions is higher, and customers are usually finance teams and business owners, not traditional consumers.
The need for specific industry solutions is more pronounced in B2B BNPL, particularly given the payment nuances of industries like real estate or global trade – where importers and exporters often have competing interests regarding cross-border payment terms.
Another example is the insurance industry with players like Ascend, which has championed BNPL for insurance, and Spott, which is leveraging the demand for, and logic of BNPL and tailoring it for the e-commerce and insurance space.
Spott is pioneering an innovative Pay-As-You-Sell business model that helps eCommerce merchants break down costly insurance premiums into smaller, more digestible sums that vary according to sales performance.
B2B-focused providers that double down on the embedded finance trend by integrating their BNPL offerings directly into industry-specific platforms can facilitate more sophisticated data collection and a better user experience to drive growth.
Overall, the growth prospects of B2B BNPL far exceed those of the B2C model, mainly because of the higher payment volumes and the working capital gap.
Steering the B2B BNPL cart with tact
While rapidly growing, we are still in the early days of B2B BNPL.
One key difference that could slow the expansion is the lower adoption of online payments in B2B vs. B2C.
To succeed, the space needs far more comprehensive and domain-specific solutions; providers need to offer a seamless payment flow and data-driven underwriting tools that minimize the risk of insolvencies and payment delays from business clientele.
As long as B2B players can accurately measure and manage risk exposure, particularly in the nascent stages of development, sizable market share and revenue are there for the taking.
By adopting a market-adjusted growth strategy, B2B BNPL platforms can significantly expand the global BNPL cart and elevate an entirely new market category.
