India's BNPL 2.0: Disrupting B2B Payments?

The Rise of Buy Now, Pay Later (BNPL)

The phrase “buy now, pay later” and the corresponding financial products have gained widespread acceptance in recent years.

BNPL has diversified, manifesting in numerous formats. These range from smaller installment options provided by fintech companies during online checkouts to closed-loop systems like Amazon Pay Later, which is now being offered beyond its initial marketplace.

Certain businesses are also introducing variations of BNPL with the intention of broadening consumer spending and access to credit.

Global Growth and Consumer Adoption

Worldwide, BNPL has experienced its most significant expansion within the consumer market. It has notably boosted both retail sales and lending activity over the last several years.

Consumer-focused BNPL solutions present a viable alternative to traditional credit cards. This is particularly beneficial for individuals lacking a credit history or those unable to secure credit from conventional banking institutions.

The Emergence of SME BNPL

However, a distinct segment within the BNPL landscape is currently gaining momentum – products specifically designed for small and medium enterprises (SMEs).

This developing area is commonly referred to as “SME BNPL.”

It represents a new avenue for providing flexible financing options to businesses.

The Shift to Online B2B Commerce in India

Over the last ten years, India’s e-commerce sector has experienced substantial expansion. Increased access to smartphones and the internet has fueled rapid growth in e-commerce, impacting both major urban centers and smaller towns. Simultaneously, consumer credit has become more accessible, with credit cards and digital lending driving consumption in both online and offline retail environments.

However, the extensive B2B supply chain supporting this retail boom faced significant challenges due to numerous intermediaries and a lack of streamlined processes. Several technology companies responded by bringing organization to the previously fragmented B2B commerce landscape.

Since 2020, India’s B2B e-commerce sector has seen accelerated development. A considerable shift has occurred, with small businesses transitioning from paper-based systems to smartphone applications for managing their daily operations. This transition has fundamentally altered business transaction methods.

The COVID-19 pandemic further accelerated this trend, compelling small businesses that previously relied on traditional, physical methods for procurement to explore and adopt new online models for conducting business.

Furthermore, the Indian government’s promotion of the Unified Payments Interface (UPI) – an instant payments system – has revolutionized how individuals transfer funds and settle payments with merchants. The next crucial step in resolving the digital B2B challenge involves integrating credit directly into each transaction and invoice.

When contrasting online B2B transactions with their offline counterparts, a key element remains absent: the credit terms extended to small businesses by their suppliers, distributors, or vendors. Unlike consumers, businesses acquire goods and services with the intention of resale, value addition, or further distribution.

This process isn't instantaneous and operates within a defined timeframe. Consequently, many small businesses require credit payment terms when purchasing inventory. As B2B commerce expands digitally, a Buy Now, Pay Later (BNPL) product tailored to the needs of SMEs can facilitate their growth and ease cash flow pressures.

Distinguishing Consumer BNPL from BNPL for SMEs

A BNPL (Buy Now, Pay Later) solution tailored for SMEs functions as a financing option for small businesses when making purchases from suppliers, distributors, B2B marketplaces, or aggregator platforms.

Consider this scenario: a retailer routinely purchases 100 pounds of rice weekly from a distributor, a practice sustained over several months. Providing a credit line capable of covering 200 pounds of rice with a 14-day repayment period would aid the retailer in managing working capital and ensuring uninterrupted supply access. The BNPL provider’s risk exposure would likely be reduced, as payment delays could lead to supply restrictions from the distributor.

This contrasts with conventional credit limits assigned based solely on bank statements or financial records, offering unrestricted usage for any business expenditure.

Given that the typical SME customer often experiences fluctuating cash flow, seasonal variations, and working capital challenges, a credit solution offering adaptable usage and repayment conditions is essential. Ideally, BNPL options should allow businesses to repay debts at their convenience, with interest calculated only on the utilized amount and the duration of credit use – mirroring an overdraft facility. This adaptability prevents the burden of fixed monthly installments and facilitates effective financial planning.

This represents a key divergence between consumer and SME BNPL. Individuals with regular salaries can reliably meet monthly debt obligations, whereas SMEs require flexibility due to the inherent nature of their operations.

SME BNPL products should also incorporate controls regarding usage. While most consumer BNPL companies assess customers based on their overall risk profile and repayment capacity, irrespective of the merchant, SME BNPL can operate in both closed-loop and open-ended models.

An open-ended model necessitates a comprehensive assessment of the business’s risk and ability to repay. Conversely, a closed-loop system focuses on evaluating transactions with a specific supplier, distributor, or B2B marketplace to gauge repayment probability.

Concerning repayment periods, consumer BNPL often presents varying terms to the same customer based on the purchase type. For instance, a BNPL provider might offer 15 days of credit for a food delivery app purchase, while extending three- or six-month payment options for purchases on platforms like Amazon. SME BNPL typically provides consistent credit terms across providers and merchants, contingent on the business’s industry.

Regarding pricing, SME BNPL is frequently characterized by merchant-provided subvention – an interest-free period – akin to traditional offline credit, where retailers receive a grace period from distributors before payment is due.

The following table summarizes the key differences between consumer and SME BNPL:

• Feature of BNPL

• Consumer BNPL

• SME BNPL

Feature of BNPL	Consumer BNPL	SME BNPL
Entity underwritten	Consumer	Transactions/invoice(s) of the SME
Repayment terms	Fixed — bullet or EMIs	Flexible — per day interest
Cost for borrower	Subvented or interest on EMIs	Mostly subvented
Tenure	Multiple — customer choice	Fixed — driven by industry/sector
Usage	Open-ended, multiple/large number of partners	Closed loop or open-ended (few partners)
Liability	Individual	Business only or joint (business and business owner)

SME BNPL and Cash Flow Underwriting

A significant challenge within the SME credit sector stems from the prevalent use of balance-sheet-based underwriting by established lenders. Over two-thirds of Indian small and medium-sized enterprises experience limited or no access to formal credit due to this approach.

This is often because they lack formal financial statements – many small businesses don’t create or audit them – or because reported revenues are incomplete, with a substantial portion of income occurring in cash.

Traditional underwriting methods prove ineffective in these situations. Buy Now, Pay Later (BNPL) solutions offer a viable alternative, particularly when utilizing flow-based or transaction-based underwriting for SME credit.

Because BNPL typically facilitates business purchases, credit assessment can focus solely on short-term cash flow projections rather than overall net worth.

The Role of the OCEN Framework

The Open Credit Enablement Network (OCEN) framework demonstrates the potential for scaling cash-flow-based underwriting. This allows for increased access to small-ticket and short-term loans for SMEs.

By leveraging historical transaction data to underwrite future invoices, an SME BNPL product can minimize extensive documentation requirements.

This reduction in friction – avoiding the need for financial statements or detailed bank transaction histories – can significantly boost product adoption.

Simultaneously, lenders can monitor transactions to ensure credit limits align with the business’s actual cash flow.

Benefits of Flow-Based Underwriting

• Reduced reliance on traditional financial statements.
• Faster credit approval processes.
• Increased access to credit for SMEs with limited financial history.
• Improved risk assessment through transaction monitoring.

Ultimately, cash flow-based underwriting represents a more inclusive and efficient approach to SME lending, unlocking opportunities for businesses previously underserved by conventional methods.

Sector-Specific Considerations for SME BNPL

The particular industry in which a small business operates is a crucial factor for providers of BNPL (Buy Now, Pay Later) solutions geared towards SMEs.

For instance, businesses dealing in fast-moving consumer goods or groceries generally operate on a short turnover cycle – typically seven or fourteen days – and therefore necessitate a credit period not exceeding fourteen days.

Similarly, pharmaceutical retailers commonly anticipate credit cycles extending up to thirty days.

Designing BNPL Offerings with Sector Nuances

While the standard credit terms demanded by a given sector are vital during the design phase of a BNPL offering, additional sector-specific details must also be taken into account.

Profit margins, which vary considerably between industries, directly influence the terms that can be offered, particularly regarding potential merchant subvention.

Furthermore, merchants may strategically utilize credit facilities to procure specific SKUs (Stock Keeping Units) through the BNPL product, while opting for immediate cash payment for others based on SKU-level profitability.

The Growing Need for SME Credit Solutions

The increasing migration of B2B transactions to online platforms highlights a pressing need for enhanced credit products tailored to SMEs.

SME BNPL represents a logical progression in supporting small businesses, especially considering the credit constraints exacerbated by the pandemic, particularly in developing nations and smaller Indian towns.

With the continued expansion of the digital B2B landscape, it is reasonable to anticipate that BNPL could become a fundamental component of small business operations.