The past 3 years have seen enormous growth in B2B e-commerce. And this has been accompanied by the emergence of digital payments providers such as Hokodo, Kriya and Billie, who help B2B merchants offer trade credit to their customers instantly and with minimal friction at the checkout.
For merchants looking to select a digital trade credit provider, the various firms can often appear similar. But under the hood, there are important differences that should factor into any decision.
One of the most important ways in which providers differ is in their approach to making credit decisions. This may seem like an insignificant technical detail, but the implications for merchants and their clients are enormous.
In-house vs. outsourced credit decisions
Many providers choose to outsource their credit decisions to third parties. Credit rating agencies such as Credit Safe or Dun & Bradstreet provide credit scores and recommended credit limits for trade buyers. Similar information can be obtained from trade credit insurers such as Allianz Trade or Atradius - in these cases accompanied by the option to transfer the credit risk to the credit insurer.
External credit decision vendors allow a digital trade credit provider to launch their platform quickly. But they don’t deliver a great experience for merchants.
The alternative approach, which we adopted at Hokodo, is to build a proprietary credit decision engine. This is an expensive and resource intensive undertaking, but has enabled us to unlock a range of benefits for merchants, which are described below.
Rejection reasons and Credit Actions
There are numerous reasons why a buyer may not be eligible for trade credit on any given transaction. Perhaps their public filings reveal something concerning like a distressed financial position or a liquidation petition. Perhaps their company’s accounts are overdue. Perhaps their company is still young and hasn’t yet filed financials, meaning their credit limit is insufficient. Or perhaps they are severely overdue on a prior invoice and so their access to credit has been suspended.
At Hokodo, whenever we reject a transaction, we also provide a rejection reason to the merchant who can then choose what to do with this. Perhaps they want to show it to the buyer at the checkout. Perhaps they want their sales team to be aware of the reason so it can be addressed verbally. By making rejection reasons available to merchants, we give them the choice. This choice simply isn’t available if the trade credit provider is relying on third parties whose credit decisions are ultimately a “black box”.
Recently, Hokodo has gone one step further with “Credit Actions” (CA). This feature recommends steps a buyer can take in order to unlock trade credit following a rejection. For example, our API response will inform the merchant (and ultimately the buyer) that they need to file their overdue accounts to become eligible; or pay their overdue invoices; or submit full financials to Hokodo’s credit analysts since the public ones are abridged.
For merchants whose buyers are placing one-off orders, features like CA probably don’t matter that much. But if a merchant is offering trade accounts to a number of key account buyers who represent an important part of their revenue, then it becomes critical to maintain eligibility for each of these customers, and CA is an important tool for achieving this.
Buyer behaviour
Online and offline merchants have a huge amount of information about their customers which the credit rating agencies never see. They know about the length of their relationship with a buyer and their settlement history. They also understand the importance of the goods they supply to the buyer - for example, a supplier of office furniture will understand that goods they sell to a small services business are likely a one-off, whereas sales made to a furniture retailer are likely repeat transactions and are part of a business-critical relationship which that buyer will not want to imperil.
These insights have enormous implications for the non-payment risk of a given transaction. And at Hokodo we’re able to take account of that information to make better credit decisions. For example, our algorithms will automatically increase a buyer’s credit limit to reflect positive settlement behaviour; while our data platform is able to ingest segmentation data about a merchant’s customers to tailor credit rules per segment.
This in turn allows us to strike a better and more sustainable balance between offer rate and bad-debt rate, benefits which are ultimately passed on to our merchants. None of this is possible when using third party credit vendors.
The human touch
Every company is different, and no algorithm can take account of all the complexity we experience in real life. At Hokodo we employ a team of credit analysts who are able to conduct manual reviews on buyers and decide whether an automated decision should be overridden.
This is particularly important for merchants who have key accounts transacting large amounts each month. If one of those buyers hits their credit limit or gets blocked entirely, the implications for the merchant can be severe. Fortunately those are also the buyers who tend to be most willing to share additional information with the merchant (or their trade credit provider). So we often see, for example, that reviewing more up-to-date management accounts, or understanding details of the buyer’s medium-term financing strategy, allows our analyst to unlock a significantly larger credit limit for the buyer.
By contrast, trade credit providers who rely on third party providers for their credit decisions typically have no ability to take account of this information meaning that important buyers end up blocked from accessing the credit limits they need, expect and deserve.
Conclusion
It can often seem like digital trade credit providers all offer the same thing. But if you care about how decisions are made about your buyers - and particularly if you have a subset of “key account” buyers who are important to you - then it pays to look a level deeper when choosing a partner.
Book a call today to learn more about the flexibility and transparency of Hokodo’s digital trade credit solutions.
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