A few years ago when the wave of consumer buy-now-pay later (BNPL) adoption took off, it was only a matter of time before entrepreneurs looked into a B2B proposition.
On the surface it makes sense. B2C merchants seem to be enjoying the fruits of BNPL, including an increase of up to 30% in average basket sizes.
BNPL consumer giants like Klarna also appear to be gearing up for a serious B2B push. Recently, the Swedish-based company made investments in to BNPL B2B scale-ups Biller and Billie (expect
a confusion rebrand soon).
According to a recent report by Bain Consultants, B2C buy-now-pay-later accounts for 5% of online retail transactions in the UK, and a whopping 23% of online transactions in Sweden. In the
US, that figure is just 2-3% but expected grow substantially to follow Europe’s adoption rate over the next few years.
While B2C success is evident (even despite recent VC ‘valuation corrections’), the world of B2B financing is complex. Not to mention aggressively
fortified with a long list of finance and leasing solutions, tax strategies and various layers of commission structures.
Recap On BNPL Pricing
Buy-now-pay-later, in its purest form, keeps the cost of a product or service interest free for a buyer. In order to do so, the merchant or seller pays a ‘discount’ on their sale price (or invoice).
Using a typical consumer BNPL example, if you buy a small TV from a store for $100, your BNPL provider will pay that store $94 and then collect $100 back from you over 8 weekly instalments.
This means the store pays a 6% ‘discount’ on every sale. In return they can leverage this BNPL offering to customers like you with an expectation to boost their sales.
Whether a B2C or B2B BNPL solution, the costs of what pricing must cover are loosely defined as:
The first 3, cost to acquire, cost of capital and defaults are what we’ll explore in this article.
Any BNPL solution, that seeks to enter the B2B market with competitive pricing, will need to take these costs in to consideration by strategically infiltrating niche areas within the B2B buyer and seller transaction (I'll cover this in
later articles on B2B BNPL Product Fit and Sales Engines).
Pricing For Acquisition
One of the significant differences between B2C and B2B BNPL is the cost to acquire users.
In nearly all settings, B2B acquisition is more expensive per unit customer (even when consumer regulation is considered). From finding and targeting the correct business decision makers, all the way to onboarding and underwriting a company with complex
ownership structures and income streams.
Furthermore, scaling a SME BNPL product is mostly reliant on a B2B2B sales approach. Meaning the BNPL offering is promoted largely through the seller, who may or may not be very capable or motivated to do so.
Some could argue consumer BNPL scalability is similar: B2B2C. But the nature of the B2B supply chain, unlike consumer transactions, means you won’t always have the ability to integrate and promote a BNPL solution through a fast online checkout setting.
As I will uncover in the next article on Product Fit, the rules also change when you are lending to either a sole trader or limited company.
B2B just takes more work.
The pricing in turn needs to reflect this reality. To begin with, BNPL B2B offerings should understand their true customer acquisition costs and price according. Repeat business income should also be taken in to consideration post onboarding (which is why
many consumer BNPL firms have adopted a loss leading approach).
Another consideration within B2B acquisition costs are commissions. Whilst commissions do exist in B2C financing (e.g., between comparison sites and lenders, or between mortgage brokers and banks), B2B suppliers (and platforms especially) are entrenched
with existing finance offerings to support their sales process: from referral based partnerships to more recent sophisticated embedded lending.
These partnerships, promoted to the supplier’s customer base in various forms, can be extremely lucrative from a commissions perspective. Offering a new B2B BNPL service may well cannibalise any revenue stream for a supplier with an existing finance programme.
Whilst there are unique cost benefits of B2B BNPL over traditional finance partnership programs (including the ability for sellers to remove customer discounts), BNPL providers will still need to work out ways to compensate suppliers for this potential loss
in revenue, which could include their own commission programme or by reducing their merchant discount charge.
Pricing For Cost Of Capital
In order to keep the product interest free for customers, time to repay is especially important within BNPL. This is because most lenders pay a cost of capital on the money they lend out. The longer you loan out your money, the more expensive it becomes.
The 6% discount revenue, as used in the example above, will only allow providers to offer a BNPL period for limited amount of time. To extend the repayment term offered to customers, a BNPL solution must either a) increase the discount cost it charges its
sellers, or b) also charge the customer a fee (defeating the purpose of true interest-free BNPL).
That’s why you won’t see an interest-free BNPL solution for much longer than 90 days.
SMEs, based on their credit worthiness, can have multiple financing strategies to support their cashflow in the short and long-term. In turn, based on product risk settings, lenders can also obtain funding lines that make cost-of-funds pricing more feasible
and competitive.
Take asset finance for instance, used as a common tool SMEs use to acquire long term assets (12+ months). It’s often far cheaper than unsecured lending and repayments can be spread out to match the income or value which the long-term asset can produce (often
years).
Overdrafts are also a tool used by businesses to manage short term cashflow needs (usually 12 months or less). While more expensive than BNPL, they can provide SMEs with the flexibility to purchase stock upfront at a discount. SMEs can also leverage overdrafts
for a period of greater than 3 months - especially useful in longer stock turnover cycles (the time between buying and selling goods).
Finally, many suppliers already offer their buyers terms of trade on invoices (from 1-3 months). In this scenario, whilst it may seem obvious that it is in the supplier’s best interest to offer BNPL - to a) get paid upfront and b) reduce risk of getting
paid - a seller may have no other choice but to offer terms of trade in order to remain competitive within their given industry.
Pricing therefore, to cover cost-of-funds, is the close cousin of BNPL’s product fit (see part 2).
Pricing For Defaults
They say lending money is easy. Getting it back is the hard part.
In normal circumstances, it is best practice for a lender to provide bespoke pricing based on the risk profile of a particular given SME. Similar to insurance, how likely is it for a particular borrower (or policy holder) to pay back their loan (or make
a claim)?
Default trouble has plagued many B2C BNPL lenders recently. Under pressure to scale quickly, the fundamentals of underwriting were loosened in order to acquire users at rapid pace (this has ethical implications too).
Using data correctly, B2B lenders are able to create risk default profiles based on categorisation. One such category includes a SME’s industry that they operate in. For instance, a good lender will know the default percentage of their construction customers
vs Retail customers, and in turn, offer pricing that covers the potential default cost to each industry portfolio respectively.
The challenge however of scaling a BNPL solution through B2B suppliers is the limitation on pricing flexibility. Instead, BNPL solutions must standardise their risk profile in order to negotiate and agree on a discount charge with sellers upfront (often
this will include a set repayment period to be advertised to the seller’s customer base of SMEs).
By leveraging data correctly, B2B BNPL providers can e.g., still determine their minimum acceptable risk across industry verticals and also set individual borrower BNPL limits to price for defaults correctly.