In our last blog, we talked about the fast-growing consumer BNPL space. In part 2 of our BNPL series, it is the commercial BNPL sector going under the scanner. Though still in the nascent stage, SME-focused buy now pay later financing options are slowly making their way to the marketplace. In this blog, we will look at this burgeoning space and the tools needed to navigate its highs and lows.
Commercial BNPL – A sector ripe with potential
The commercial BNPL space hasn’t taken off like its more famous counterpart – the consumer BNPL sector which reached stratospheric heights in 2020-21. Yet, that is. According to the Small Business Association (SBA), small businesses make up over 99% of the nearly 29 million firms in the US. Despite being in the overwhelming majority, access to credit is still a huge hurdle for many SMBs. Even at the height of the pandemic last year where a record number of business loans were given out, SMB loan approvals from big banks sat at just 15.4%. In 2021, approval rates slipped further down to around 13%.
With big banks declining over 85% of commercial loan applications, there is an obvious gap here to fill. This makes the commercial lending space one that is brimming with potential for institutional and alternative lenders looking to diversify their portfolios. In addition, the BNPL platform with its key offerings of easy accessibility, improved transparency, and business empowerment could be a Godsend for firms overlooked by traditional financiers. The flexibility in repayments that BNPL affords can also take care of the long-standing cash flow problem that a lot of businesses experience. Not surprisingly, 75% of business owners say they are likely to adopt installment repayment solutions if available. So, SME BNPL has a lot to offer on both sides of the aisle.
Where commercial BNPL stands now
As it stands, lenders are slowly but surely waking up to the potential of offering BNPL-type businesses loans that are easy to access and have no associated interest or hidden fees. Recently, peer-to-peer (P2P) lending firm Funding Circle announced the launch of FlexiPay, a BNPL business loan product. It offers businesses instant credit lines of up to around $68,000 which they can then repay in 3 interest-free installments. The only cost for the business is a 3% flat fee. P2P lender Zopa is also expected to follow in Funding Circle’s footsteps.
In Asia, where interest in SME BNPL is high, major players such as Mastercard and UK’s Standard Chartered have entered the commercial BNPL market. Earlier this month, payment giant Mastercard announced that it would offer BNPL financing to Asian businesses with its Pay & Split card. This came after around 80% of merchants surveyed by Mastercard expressed keen interest in using a BNPL-type financing product. Similarly, Standard Chartered now offers collateral-free BNPL credit lines of up to $26,000 that businesses in India can pay back in flexible repayment schedules.
In addition, companies such as CIT, Zip, and Dell Financial Services all now offer merchants POS (Point of Service) financing that can be paid back in interest-free installments. As appetites and awareness of these offerings grow, one can expect that the number and stature of providers stepping into the fray will too. According to McKinsey, as of now, the SME BNPL financing market is growing at a rate of 10% –
15%. While this is significantly less than consumer BNPL’s growth rate of 45%, it still represents a steady increase.
The challenges of the commercial BNPL space
A key differentiator between BNPL and traditional business financing is the speedy convenience with which companies can avail these services. One of the unique selling propositions of the BNPL offering is that businesses can get their loans approved in a matter of minutes, that too without the hassle of needing to procure any physical collateral for it. To provide this superior user experience, BNPL providers must rely on conducting soft credit checks that take a fraction of the time traditional loan underwriting formalities do.
Needless to say, this approach can be hazardous. In the uncertain economic climate that we live in where businesses can collapse at a moment’s notice, ineffectual underwriting practices are never wise. So, BNPL lenders must ride the fine line between mitigating credit risk and staying accessible. They must also stay on top of changes by constantly monitoring for fluctuations in their borrower’s business health. This can help them limit their losses significantly.
This kind of prudent credit decision-making is possible only with the use of technology. Human-backed manual processes do not have the capacity to speedily process all the data needed to make a quick yet well-informed business decision.
Essential components needed to manage credit risk in the SME BNPL sector
Here are some essential components that every commercial BNPL provider should invest in to be successful in this space:
Alternate data
The foremost challenge facing commercial BNPL service providers is information. This is especially true when it is first-time businesses or SMBs that apply for loans. When compared to enterprise corporations, start-ups and SMBs have very little financial or credit information for lenders to go by when trying to make wise credit decisions. In such scenarios, how do BNPL companies get the information needed to make a quick lending decision? The answer lies in the world of alternate data.
Alternate data can often give a realistic and refined view of a business's ability to repay its loans. Lenders can conduct quick affordability checks using third-party data.
One example of this could be a company's transaction history with its distributors and suppliers, a good historical reflection of its ability to repay loans. Similarly, studying a company’s digital footprint can reveal information that financial statements cannot. For example, a series of bad customer reviews can point to failing business standards or an unsustainable business model. By using alternate credit scoring and monitoring techniques and tapping into a company’s digital identity and customer behavioral biometry, providers can make lending assessments more accurately. Crucially, this is the case even when traditional avenues of business information are unavailable.
Tech-driven systems for data gathering, processing, and decision automation
Traditional credit scoring and monitoring techniques need to rely only on one source for all their information – credit bureaus. For alternative credit monitoring methodologies, however, there is no such central repository of information. Unfortunately here, data sources can be as varied as the information gathered itself. Since alternate data is pivotal to quick decision-making, companies should invest in systems that can automate the process of gathering sufficient information from different online sources. These systems should also perform the analysis needed to validate a borrower’s ability to repay.
Crucially, since speed is a key BNPL offering, all of this must happen in real-time too. AI-augmented systems are the way to go here as they can quickly integrate information from different sources and speedily process it to give prompt, data-backed approve/decline credit decisions. With their ability to easily integrate new information, such systems also give BNPL providers the agility needed to keep pace with emerging risks and regulations in this highly evolving market space.
A note about TRaiCE
TRaiCE is an AI-augmented business risk monitoring platform that has the data gathering, processing, and analyzing prowess needed to monitor and mitigate risk in the commercial BNPL sector. One of our core strengths is our system’s ability to continuously process data. Our proprietary algorithms can sift through large datasets with many parameters in them to give you more accurate credit assessments of your end-users.
The TRaiCE system can also easily integrate both structured and unstructured data, giving providers the ability to leverage the mountains of digital information out there. In addition, the self-learning nature of our ML models ensures that they can handle rapid changes to identify newer forms of risk more accurately. With the up-to-date risk profiles that TRaiCE provides, lenders can get a real-time picture of their borrower’s business health to make prudent and quick lending decisions with.
Conclusion
Just like consumer transactions, B2B proceedings are also increasingly moving online. Business/commercial financiers need to stay in step with this wave of digitalization or risk falling behind. In addition, with SMBs playing a pivotal economic role in terms of GDP growth and creating jobs, it is imperative that they have access to credit options that can help them overcome the cash flow and working capital problems that they usually face. Commercial BNPL solutions can help with both these issues. Given this, it is not hard to imagine a future where buy now pay later offerings becomes an important part of business financing. To prepare for such an eventuality, however, commercial BNPL providers must have tech-driven systems in place that can give businesses access to much-needed credit almost instantaneously while offsetting risks just as quickly.
