Pandemic lockdowns accelerated the already growing popularity of Buy Now, Pay Later (BNPL) transactions, but for many of the operators behind these transactions, margins can be wafer thin. So, how sustainable is the BNPL business model?
BNPL is a payment model that allows customers to make purchases and pay for them in instalments over time instead of paying the full amount upfront. Over the past several years, shoppers have turned to BNPL platforms to delay or spread the cost of purchases they might otherwise have been unable to afford. During the pandemic, many retailers were forced to close their doors to the public for months on end. BNPL offered a way for consumers to purchase products online and try them out before paying.
Despite these benefits, we’ve seen and heard stories in the news more recently that paint BNPL in a less favourable light. Concerns that BNPL encourages unsustainable spending and puts consumers at risk of debt have been voiced by regulators, and Klarna – the world’s largest and most successful Buy Now, Pay Later business – has struggled to become profitable.
Meanwhile, in the world of business trade, a B2B Buy Now, Pay Later model has emerged as one of the most talked about and fastest-growing methods for settling business-to-business transactions.
This blog post analyses the differences between lending in consumer and business commerce and explores the sustainability of the Buy Now, Pay Later business model.
Differences between the B2B and B2C BNPL business models
While the concept of the BNPL business model is similar in both B2C and B2B contexts, they are distinct solutions that should not be used interchangeably.
- Target audience
This one is pretty obvious but still worth mentioning. B2C BNPL products are designed for individual consumers who want to make purchases for personal use. They are often used for retail shopping in an online setting.
In contrast, B2B BNPL is built for businesses that want to buy goods, services or supplies from other businesses. It is a tech solution intended to support operations and help businesses to grow rather than a payment method for personal use.
- Transaction volume and value
A feature of consumer commerce is that order value is often small while transaction volume is high. Therefore, consumers often use BNPL frequently but for relatively low-cost items which are usually non-essential purchases.
In the B2B space, transactions tend to have higher average value but lower volumes. Companies may use B2B BNPL for purchasing essential inventory, equipment or services required to run their operations.
- Risk assessment
Assessing risk in B2C BNPL is focused on individual consumers' creditworthiness. Providers evaluate the credit score and payment history of a consumer to determine their eligibility for pay later services.
However, in B2B, risk assessment is more complex. Providers assess the creditworthiness of the business entity itself, including its financial stability, payment history and many other data points. With orders of such high value, the business’s financial health is a critical factor in determining whether BNPL options are extended.
- Payment terms
Payment terms for consumers are usually quite short, ranging from a few weeks to a couple of months, depending on the provider chosen and the purchase value.
In B2B BNPL, terms are typically longer to accommodate the complex sales cycles and payment periods common in business-to-business transactions. Payment periods often range from 30 to 120 days.
- Integration with accounting systems
B2C BNPL platforms are often standalone services integrated within consumer-facing checkouts, allowing customers to choose to pay later at the point of purchase.
Meanwhile, B2B BNPL solutions may need to integrate within the accounting systems of a seller in order to provide seamless payment processing and manage the complexities of invoicing and accounting.
Learn more: We cover the differences between B2B and B2C Buy Now, Pay Later in more detail in this blog post.
Size and growth of the B2B BNPL market
Buy Now, Pay Later for business is a burgeoning market that has shown accelerated growth in recent years. According to research by Marqeta, 43% of European businesses used a BNPL solution to pay for a business purchase in the first three months of 2023.
In a reflection of the way that BNPL has become a popular payment choice among consumers, experts believe the B2B BNPL market will grow significantly in the coming months and years. Juniper Research suggests global Buy Now, Pay Later spending will reach $437bn (£352bn) in 2027 – up 291% from 2022.
With demand for B2B BNPL high, it’s no surprise that several fintechs specialising in this area have been established around the world in the past several years.
Geographical markets where B2B BNPL is gaining traction
B2B BNPL platforms have gained traction in various geographical markets across the globe. Although the list below is not exhaustive, it demonstrates how the B2B Buy Now, Pay Later business model is permeating international trade.
UK and Europe
Many European countries have witnessed the rise of B2B BNPL services. Countries like the UK, Germany, the Netherlands and France in particular, have seen increased adoption, but Pay Later providers are operational in other markets, including Norway, Belgium and Spain.
North America
The B2B Buy Now, Pay Later space is thriving in North America. Balance competes with established provider TreviPay and Affirm spin-out company Resolve to provide BNPL to US businesses.
Asia
In more recent times, B2B BNPL has started to gain traction in India, primarily in sectors like technology, retail, and manufacturing. Various Southeast Asian countries, including Singapore, Malaysia and Indonesia, have also experienced a rise in B2B BNPL services, with growth particularly observed in e-commerce and tech sectors.
Brazil
In South America, Brazil has been a key emerging market for B2B BNPL, with companies catering to industries such as agriculture, manufacturing and construction.
The impact of B2B BNPL on the trade ecosystem
The B2B BNPL business model has the potential to transform trade by providing businesses with more flexible and efficient payment options, enhancing cash flow, strengthening relationships and encouraging much-needed digital transformation within the sector.
Improving cash flow
BNPL empowers businesses to purchase goods and services on credit, enabling them to preserve their working capital. This flexibility can be especially beneficial for small and medium-sized enterprises (SMEs), many of which suffer from cash flow issues. B2B BNPL providers pay sellers up front, meaning that parties on both sides of the transaction can better manage their cash flow and invest in growth opportunities.
Increasing sales
When businesses offer flexible payment options, it reduces the barriers to purchase and encourages customers to place orders. By facilitating larger and more frequent transactions, suppliers experience increased revenues and market share.
Reducing the risk of non-payment
B2B BNPL providers conduct risk assessments before extending credit to businesses. Gauging the creditworthiness of business buyers in this way helps to minimise the risk of non-payment. It can also incentivise businesses to pay on time in order to maintain their creditworthiness and boost credit limits, ultimately leading to a more stable ecosystem.
Stimulating B2B e-commerce
The BNPL business model can encourage more buyers to embrace digital platforms for their procurement needs. With B2B BNPL integrated into digital marketplaces and other online purchasing platforms, businesses are attracted to the seamless buying experience that they’re used to as consumers.
Creating fintech innovation
The rise of B2B BNPL has provided opportunities for fintech companies to innovate and develop new financial products and services tailored to the needs of businesses, such as specialised lending platforms, cash flow management tools and data analytics solutions.
Reducing reliance on traditional financing
B2B BNPL may impact traditional financing methods, such as trade credit and business loans. As businesses adopt BNPL options, they might reduce their reliance on traditional credit lines or seek alternative financing methods.
Case study
First launched in France in 2019, B2B marketplace Ankorstore provides more than 300,000 independent retailers across Europe with a product catalogue of over 30,000 brands selling a variety of goods from scented candles to organic marmalade.
In establishing its value proposition, Ankorstore identified the importance of offering an easy-to-use payment interface akin to the checkout process of a consumer website. It also wanted to offer payment terms of up to 60 days, even on a buyer’s first purchase, which would set it apart from the 30-day payment terms offered by many competitors.
However, Ankorstore recognised a number of challenges with creating such an offering. Identifying credit and fraud risks in-house, overseeing credit limits and managing late payments would require resources that the team simply didn’t have.
Ankorstore’s team established the need for a third-party provider and soon discovered the concept of B2B Buy Now, Pay Later. Following a rigorous RfP process, Ankorstore selected Hokodo as its B2B BNPL partner. Adding payment terms has helped Ankorstore foster trust on their platform and expand into 28 countries, while sellers and buyers get a payment option that eases cash flow issues.
“Thanks to the strong benefits that deferred payments bring, retailers that use them are more loyal, more sticky,” explains Christophe Bertrand, Head of Payment, Payment Terms & Fraud at Ankorstore. “On average, they spend more - total order values tend to increase with each transaction - and they transact more frequently. They also tend to expand their purchasing categories.”
The Future of B2B BNPL
So, is the BNPL business model sustainable? In B2B, we certainly think so.
Merchants, marketplaces and other sellers that have integrated our B2B BNPL solution have realised a number of key benefits. On average, they see a 40% increase in conversion rates, a 30% increase in average order value and a 24% increase in purchases per month. Sellers say that B2B BNPL helps them to win new business and boost customer retention, while reducing back office operations.
Meanwhile, our recent partnerships add to this positive story about the future of the B2B BNPL market. This year alone, we have launched collaborations with banks, including BNP Paribas and Citi, and payment services providers (PSPs) such as Mangopay. Citi doubled down on their support of B2B BNPL by investing in Hokodo in a Series B funding extension.
In B2C, the future is unclear. When it arrives, BNPL regulation is likely to lead to significant changes to the way that lenders can offer credit to individual consumers, and it still remains to be seen whether players like Klarna will begin to turn a profit.
However, in a video for the Financial Times, journalist Siddharth Venkataramakrishnan finds that, as the market continues to evolve, it could be that businesses prove to be BNPL’s most lucrative clients, while B2C offerings become less popular.
Catch Hokodo co-founder Louis Carbonnier discussing B2B BNPL and the sustainability of Buy Now, Pay Later in the video below.
