Small and medium enterprises (SMEs) have long been the backbone of many economies. They provide essential products and services, create jobs, stimulate economic growth, and contribute to innovation. Despite these benefits, SMEs often find it difficult to access financing due to their size or lack of collateral. This has led to an increasing need for more accessible working capital loans that are tailored specifically for SMEs.  

However, for the better part of the last few decades, business owners have largely remained frustrated with the lengthy application processes and extended underwriting timelines demanded by these legacy institutions. The World Bank’s report outlines that the annual financial needs of Micro, Small, and Medium-sized Enterprises (MSMEs) around the globe reach a staggering $5.2 trillion – nearly one and a half times larger than today’s lending market for such ventures. 

Savvy business owners around the world are beginning to utilize B2B BNPL (Buy Now Pay Later) solutions. This powerful financial option offers a speedy and stress-free lending partnership that is beneficial to both parties involved. Statistics show that about 33% of the largest marketplaces/e-commerce stores have already implemented B2B BNPL. This is expected to increase in 2022 and beyond, as 90% of B2B customers want the same experience that buyers on B2C sites get. 

What makes B2B BNPL Unique?  

B2B BNPL is a new payment solution that is redefining how SMEs obtain working capital loans. By allowing businesses to pay for goods or services over time rather than upfront, B2B BNPL enables them to manage their cash flow more effectively while still being able to buy necessary items without disruption. With B2B BNPL as an option, SMEs can now better use their resources without worrying about liquidity issues or credit risks associated with traditional loan options—benefiting both the business owners and the economy. 

B2B BNPL is designed to support business buyers on marketplaces like eCommerce platforms, using Embedded Finance. It is a combined effort between financial institutions, merchants, and FinTechs to provide MSMEs with reliable working capital.    

In contrast to traditional working capital loans offered by legacy institutions which generally have a long and demanding application process, integrating B2B BNPL on marketplaces empowers SMEs with immediate access to working capital – quickly and conveniently at their fingertips so they can scale their businesses.  

Current State of B2B BNPL Solutions   

Following the sweeping effects of COVID-19, B2B BNPL solutions from FinTechs have been receiving heightened interest and usage as businesses around the world resume typical operations. 

Research by IDC highlights that the current surge of applications in B2B BNPL was largely promoted by the PPP (Paycheck Protection Plan) governments extended across the world during the pandemic. While businesses initially turned to their traditional banking partners to apply for small working capital loans, traditional bank systems were quickly overwhelmed as most lacked the necessary infrastructure to service the high demand. This is where global fintech institutions stepped in, using their experience in digitization to disrupt a market that has been ripe for some time. 

Stripe and Square, two prominent B2B payment aggregators, made use of their Big Data capabilities combined with Machine Learning to process the transactions that were already accessible. This enabled them to make accurate cash flow evaluations for each individual business. Consequently, they had the ability to develop alternative credit decisioning models and offer appropriate working capital loans in a short-term period. Furthermore, these lenders also created a floating line of credit, allowing businesses to access more funds as they completed more transactions over time. 

By analyzing informal data sources for underwriting decisions, businesses have been able to easily access more affordable capital and maintain their supply chain. This not only helps these businesses but also creates a sustainable revenue stream with limited risk for FinTechs—a win-win outcome! 

Is B2B BNPL an Opportunity for Legacy Institutions?   

Research from the World Bank has shown that small and medium enterprises (SMEs) are a linchpin of national economies, creating 70% of all jobs. Despite this, the IFC estimates that a global SME credit gap of US$4.7 trillion still exists, and more than 45% of it lies in East Asia & Pacific region alone. 

In 2015, Deloitte & Visa conducted a survey that found only 40% of Singapore’s SMEs had access to formal credit instruments. Additionally, Validus Capital predicted the Indonesian SME annual credit gap was between US$160 billion and US$170 billion every year. Clearly, there is an immense lack of financial support for these small businesses around the world – making improvements in this area is necessary now more than ever. This and other statistics show how SMEs across the East Asia region (Singapore, Malaysia & Indonesia) are credit hungry and how this can be a massive opportunity for both legacy and new-age financial institutions.    

Despite its untapped potential, many financial institutions are struggling to retain customers due to the newer lenders’ simpler application procedures, quicker confirmations, alternate credit scoring techniques, and especially their enhanced lending experience.

With their busy schedules and comparatively short lifespans, modern SMEs often struggle to submit the prolonged applications demanded by lenders. In addition, due to being relatively new (less than 5 years old), most do not meet the lending criteria required for approval.

Post-pandemic, most small businesses operate either partially or fully remotely, making it difficult to meet with lenders in person and wait up to 4 weeks for approval on their loan applications. Here is an opportunity for financial institutions: by upgrading their technology and processes to match current market demands, they can gain new SME customers quickly! 

The Way Forward for B2B BNPL 

B2B BNPL has a lot of untapped potentials, especially in emerging markets such as Malaysia, Indonesia, and Singapore, which are not only home to thousands of SMEs but also suffer a considerable credit gap. B2B Buy Now Pay Later provides lenders with unique advantages, such as: 

• It is a continuous source of revenue as SMEs need to regularly replenish their inventories and maintain supply chains.    
• By taking advantage of this opportunity, lenders can expand their portfolio to include a range of new industries and activities not falling within traditional lending criteria. 
• The lender can better manage their credit risk.  
• Both parties can arrive at mutually favorable business loan terms and tenures for a win-win scenario, ensuring better revenues and a positive impact on the economy.  

Along with this, by using modern technologies, lenders can:   

• Design alternate credit scoring models to further bridge the credit gap. 
• Decrease their turnaround time, increase loan amounts, and offer more competitive loan interest rates. 
• Engineer risk management workflows and payment terms for efficiently managing their loan portfolios. 

All these capabilities and unique opportunities of B2B BNPL make it easy to realize why banks and financial institutions should prioritize upgrading their digital infrastructure, not only to serve a huge, underserved segment but also to nurture a sustainable revenue stream for the future.

Stakeholders in the space are bullish about the B2B BNPL market, especially based on the surge witnessed over the last two years and that the B2B eCommerce market is twice as big as the B2C market, according to Forrester. 

Final Thoughts

Despite being in its preliminary stages, the competition between B2B buy-now/pay-later (BNPL) solutions providers in Malaysia, Indonesia, and Singapore will inevitably push up quality levels across these regions. It is a prime opportunity for merchants, financial institutions, and FinTechs to collaborate and revolutionize traditional lending models – leading to higher ROI for all parties involved as well as improved support of Micro, Small & Medium Enterprises. Decision-makers should act fast on this wake-up call.