Episode 16 – Fintech – Need for a SNPN product for B2B, similar to BNPL for B2C
The beauty of BNPL, as it can be easily guessed, is that it allows consumer buyers to pay later. The need in B2B is actually quite the opposite – choice for sellers to be paid now, i.e. SNPN.
This episode of startupsinside is a result of talking with multiple founders in the SME financing space and some of the BNPL founders. The beauty of BNPL, as it can be easily guessed, is that it allows consumer buyers to pay later. The need in B2B is actually quite the opposite – corporate buyers already pay later, often squeezing their smaller suppliers in the process. What is needed is the choice for their sellers to be paid now, i.e. “sell now, paid now” (SNPN).
The existing B2B platforms have the networks and data, so by applying the right technology a better product and customer experience can be delivered. Every seller should have the choice of when to be paid (in advance, at the point of sale or later). World-class data and technology delivers that choice through the leading networks.
Here, I take a deeper look at the idea. Hop on!
Note – In case you are a fintech founder, looking to raise funds, I might be able to help. Reach out to abhishek@indiafintech.in. In case you are looking to invest in Indian Fintech, reach out. Would be happy to help.
Offering buyers credit as part of a purchase has been around since we know history, so what has changed? Since around 2200 BC, before the advent of physical money, merchants in the ancient middle east gave food loans to farmers.
In the last century, loans and credit cards have been widespread, enabling buyers to buy now and pay later. And yet we’re now seeing an explosion of a new variant.
In India, Bajaj Finance has been offering credit at the point of purchase since more than 15 years and is one of the best performing stock of the last decade, if not the best. Firms like PayTail, LazyPay, Simpl, ZestMoney, ePayLater and more are pushing the boundaries. Investors are pouring money in this segment overall.
So how does it change for a B2B player?
Let’s take a look at what is a typical transaction or a purchase.
A purchase involves an exchange of goods or services for payment. The “payment terms” mean that the value exchange can be:
Simultaneous = a “Cash” transaction
Payment later = a “Credit” transaction
Payment before = an “Advance payment” transaction
In the case of a credit transaction, there are different models for who provides the credit and who pays for it. Credit may be:
(a) provided by: the seller or a third-party intermediary, such as a bank that has issued you a credit card, it can also be provided by the seller itself (true in case of most B2B transactions, as we will see); and
(b) paid for: by either the seller or the buyer. With credit cards, the seller pays a fee (we know this by a more common name - MDR, so when the local coffee shop sells you a cup of tea for Rs.100, and you pay with a credit card, they only receive Rs. 98 because they pay a Rs.2 MDR fee, and you the buyer will also pay a fee if you don’t settle your credit card account within 30 days of your statement).
BNPL operates in the same way: the credit fee is typically paid by the seller.
Whether the payment terms are cash, credit or advance payment is a function of the market norms and bargaining power of the buyer and seller. As consumers, we make “advance payments” for flights and hotels, we pay “cash” for many of our day-to-day transactions, and we also buy on “credit”.
Given the time value of money, an advance payment, cash or credit transaction each has a different value, which is rarely taken into account by a consumer. For a Rs.100 purchase, assuming my marginal cost of capital is 6% and no other fees, then paying 3 months in advance actually costs me Rs. 101.5 and paying 3 months late costs me Rs. 98.5.
In consumer markets (B2C) and business markets (B2B) where the buyer is a smaller company, the default is typically a “cash” transaction. This is because the seller insists on being paid instantly, with a simultaneous exchange of value against the goods or services it provides.
Buyers would love to have the choice to pay later, which is why credit or pay later offerings such as credit cards and BNPL are so convenient, as they give the buyer the choice of paying later.
So, this is what drives BNPL!
BNPL has exploded in the market because consumers love the flexibility and the lower upfront costs that it provides. In a country like India, access to credit followed by super easy interface leading to convenience is driving the BNPL craziness.
The choice of BNPL is embedded into the checkout experience for both offline and online purchases. All consumers have to do is choose their items, ask the store person who as the BNPL app on their phone and boom, you get the product while spreading over the costs over longer period.
For online purchases, navigate to the checkout as normal, and there it is: a no-fuss and easily accessible choice to opt into paying later for their items, embedded seamlessly into their purchasing experience.
B2B – it’s already BNPL! And that is a problem
As noted above, when the buyer is a consumer or a smaller company, the default is typically a “cash” transaction, meaning the buyer pays at the time of purchase (and is enticed by the choice of being able to make it a credit transaction).
In B2B where the buyer is a typical corporate, however, the default is typically a “credit” transaction, hence the buyer pays later than the time of purchase.
So with corporate buyers, BNPL is the norm – they almost always buy now, pay later – with payment terms of 30, 60, 90 or 120+ days. The sale is a bundled transaction, where the seller is providing both:
(a) goods or services; and
(b) a period of credit.
Large corporate sellers can price the value of the credit precisely (cost of financing vs the margin decisions are usually nuanced here), but smaller companies typically don’t and do not have the bargaining power or even the analytical power to change the status quo. So a bundled transaction will typically work in the favor of a more sophisticated organization.
Now, common sense dictates that sellers would love to have the choice of a “cash” transaction, which is why early payment solutions such as virtual cards, dynamic discounting and supply chain finance have been developed. Firms which does invoice financing such as Finovate, among others, have mushroomed and they are trying to solve a real problem.
With the data and technology now available, buyers and sellers can have complete flexibility as to when they pay and get paid. Sellers would like the option of SNPN – the inverse of BNPL: a “pay me now” option as they submit their invoice.
But why do corporates prefer BNPL?
There are two reasons that corporates use BNPL:
Financial advantage: it is advantageous to hold on to cash, and their bargaining power allows them to do this; and
Process: they need to check that the goods and services are acceptable.
Financial advantage:
Viewed narrowly, it appears that the corporate is getting a “free loan”. The longer the key metric of DPOs (“days payable outstanding”) the better – an increase in a corporate’s DPOs results in the stock price going up. A lot of investors look for firms with negative cash flow days, this is what drives that. For e.g., Britania. They get money before they pay their suppliers.
Viewed with an ecosystem lens, this is not economically advantageous for a large, creditworthy buyer who trades with suppliers with a lower credit rating. The actual result of these free loans from small suppliers to large buyers is that the buyers end up paying for the suppliers’ finance cost (which is high) through the purchase price of the goods and services.
This is a problem of short-term thinking - a corporate buyer is replacing a 7-8% loan with a >20% loan from his smaller buyers! By extending payment terms, a corporate gets a short-term gain in the form of a one-off boost to working capital but is then saddled with the long-term cost of higher cost of goods sold. It causes stress to suppliers and, when it goes wrong, can have a severe reputational cost for buyers.
Process:
Money doesn’t flow until the buyer has accepted the goods or services (approved the invoice), and so the seller is at the mercy of the buyer’s approval processes.
This typically takes 10 to 20 days, but can be much longer. So regardless of payment method, there is a multi-week delay in all B2B payments where the buyer is a corporate, simply because of the process.
This is a fundamental tenet of corporate purchasing that is simply, antique, for lack of my vocabulary. In B2C, if I buy a pair of jeans on the internet, money flows in a “cash” transaction, and if I ultimately choose not to accept the shoes, then the transaction can be unwound on an exception basis.
This is facilitated by the automated checks that are done at the point of sale and the charge-back mechanism. Until now, this hasn’t existed in B2B. Machine learning, however, can precisely assess the probability of recovering any overpayments, making it possible to identify the very small number of transactions likely to be problematic and unwind them on an exception basis. There is no longer any need for a B2B payment to be contingent on the buyer accepting the goods or services.
So what’s next for SNPN in the B2B industry?
The B2C payments market has seen terrific innovation over the last few years, with the growth of BNPL only the most recent development. B2B, which is over 5x-8x larger than the B2C market, remains antiquated and ripe for massive transformation which will unleash huge value and productivity for the market.
The recent explosion of BNPL gives a good guide of what can be achieved by the smart use of technology and data to deliver better, digital customer experiences. Of course, in B2B an improved customer experience is not enough – the person in a corporate’s accounts payable department paying the invoice will rarely have the authority to adopt new tools. And inertia is strong. But that inertia can be overcome with compelling value propositions.
The beauty of BNPL is that it allows consumer buyers to pay later. The beauty of SNPN is that it allows business sellers to be paid now. The key is giving choice.
These networks reach millions of sellers who are, for the first time, being offered a “pay me now” button. Every seller should have access to it – in the procurement networks they use, in their customer’s portals, in their book-keeping system and in payment gateways.
If you think about it, that’s what lot of SME financing start ups have been trying to solve via different methods. Maybe it’s time to reverse the question and then design the solutions instead of extending the current solutions?
Hirings in Fintech Industry
Xpresslane is looking to hire a Sales and Marketing Head. Super interesting role with good equity on offer. Reach out to me on Abhishek@indiafintech.in and I will connect with the founders.
Antrepriz is looking to hire a Growth head. Reach out to me and will connect with the right person.
Finovate is looking for program managers in CEO’s office. Do reach out if you are interested
Kudos is hiring for a business analyst and a graphic designer. Reach out to either me or the founder, Pavitra here.
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