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BNPL Meets B2B: Coming Together Like Never Before

December 14, 2023

Buy Now, Pay Later (BNPL) has made significant inroads in the consumer sector, where it has proven to be a highly useful tool for shoppers looking to expand their purchasing power and gain more control over spending, while also helping merchants reach more customers and increase sales. 

With proof of concept firmly established on the consumer side, the BNPL boom now is expanding to the business-to-business (B2B) sector, where companies and their suppliers stand to reap the above-described benefits, as well as some compelling sector-specific advantages. 

And with the global business payments market estimated to be up to three times bigger than the consumer payments market, the potential upside for payment providers offering BNPL for B2B could dwarf that of the retail BNPL opportunity.  

But, like on the consumer side, not all B2B BNPL is created equal. To ensure business users can leverage the full potential of BNPL without assuming undue financial risk, solutions must offer flexible purchasing capabilities backed by responsible underwriting decisions.

With Galileo’s bank-issued BNPL solution now available for B2B use, banks can offer their business clients that optimize BNPL functionality, giving them a powerful tool to help better manage cash flow and day-to-day operations, while also deepening accountholder relationships and driving new revenue streams for financial institutions.

And while companies of all types and sizes can benefit from BNPL, high-growth segments including small and midsize businesses (SMBs), minority-owned SMBs and the “creator class” stand to be particularly well-served by the capability, according to new research indicating that B2B BNPL can help companies in those segments address some entrenched financial obstacles. 

Watch the webinar on how banks can get in on the BNPL boom.

B2B BNPL with more spending options, better underwriting. 

Like the consumer version, the Galileo Buy Now, Pay Later solution for B2B is based on the Mastercard Installments program, and features a single-use virtual Mastercard credit card that a bank can offer to customers–in this case businesses–that meet specific criteria based on their financial data that institution has on hand. 

That model features two crucial distinctions from the traditional BNPL model, in which the service is offered at digital merchants’ point of sale during the checkout process:

  • It’s safer, because the decision to offer financing is based upon a much more complete picture of the borrowing company’s financial history. This enhanced visibility enables banks and their partners to make better-informed underwriting decisions, including how much credit to extend, the number of installments1, and other loan details.  Along with simply being a sound business practice for lender banks, such responsible  underwriting measures are vital to combatting some lingering skepticism of BNPL at large, stemming from instances of imprudent credit decisioning by some providers in the consumer sector. 

  • It’s more convenient and functional for the business user, because the virtual credit card can be used to make a purchase at millions of locations where Mastercard is accepted, as opposed to BNPL offered via a seller, which can only be used to make purchases at that particular supplier. And while many businesses already have established relationships with regular vendors that enable them to break up purchase payments into installments, the flexibility of Galileo’s offering extends that utility to a much wider swath of suppliers.

Cash flow, financial planning advantages driving demand for pre-purchase installments. 

Offering small businesses the ability to break up purchases into installments before buying decisions are made enables those businesses to better plan to pay for such purchases and manage cash flow. 

And because small businesses typically operate on leaner budgets and with smaller financial reserves than larger companies and corporations, ongoing cash flow management is a critical aspect of their day-to-day operations–and long-term viability. 

One widely cited study by US Bank found that 82 percent of small businesses that failed cited cash flow issues as a major factor in their demise. Another survey from Intuit revealed that 62 percent of small businesses globally reported struggling to manage cash flow, while 32 percent said such issues had caused them to miss making payments to vendors or creditors. 

In light of the high stakes, cash flow management tools such as pre-purchase BNPL can help small businesses address a critical need to survive and flourish over the long term. 

Meeting the capital needs of underserved market segments. A look at the B2B BNPL market size.

While effective cash flow management and regular access to capital is crucial for any business, some types of companies face particular challenges in fulfilling those goals. 

Among those segments more likely to experience such difficulties are minority-, woman- and LGBTQIA-owned small businesses, along with “creator economy” businesses–typically single entrepreneurs who make and distribute content via digital platforms such as TikTok and Youtube2

Research from Mastercard found that businesses run by Black, woman and LGBTQIA owners were more likely to have been denied a business credit card, funding or loan application than were their white and male counterparts. 

In a separate study, Black entrepreneurs were three times as likely as white entrepreneurs to say that a lack of access to capital negatively affects their businesses’ profitability and almost twice as likely to cite the cost of capital as a significant challenge. 

Latino business owners struggle as well, with 43 percent experiencing challenges accessing capital, according to a recent Bank of America study

Meanwhile, digital content creators polled in another Mastercard survey widely cited financial challenges, with more than 83 percent of respondents reporting impediments such as increasing business expenses, unpredictable income streams and lack of access to funding. 

Given those inequities, helping businesses in underserved segments overcome financial challenges by offering tools such as B2B BNPL is of course an ethical imperative. But, considering the strong future growth projected for those segments over the coming years, it’s also a prime market opportunity for banks and fintechs that serve those audiences.

What is an example of BNPL for B2B?

Sunrise Café’s top-of-the-line espresso machine malfunctioned and is beyond repair. As a café renowned for its specialty coffees, this machine is crucial for their daily operations. The owner, facing the urgency of the situation, decides to close the café temporarily. She estimates that a replacement espresso machine will cost around $8,000.00. Given the café's current financial situation, the owner is wary of increasing their credit card debt, especially since it would need to be paid off in the next billing cycle. She contacts her bank to discuss alternatives and discovers the option of BNPL (Buy Now, Pay Later) for small and medium-sized businesses (SMBs). After applying, she is approved for the required $8,000.00, to be repaid in 12 monthly installments1 with a 3.5% fee rate. This arrangement divides the total cost into smaller, more manageable monthly payments, which she can comfortably accommodate in the café’s budget. Each month, she will need to pay $667.67 for the principal and $46.73 as the installment fee. She uses the single-use virtual card provided by her bank to buy a new espresso machine from a commercial kitchen supplier. Thanks to the timely BNPL option, Sunrise Café is able to resume its operations by the next week.

1Programs with over four installments or whose customers are incorporated entities may be subject to additional lending regulations and consumer protections, including Regulation Z and state lending laws.

2Mastercard Report, The Creator Class - How microbusiness is fueling the next wave  of small business, November 2022

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