Zaid Rahman is the CEO and a co-founder of the Miami-based corporate card and payments app company Flexbase.
As valuations of consumer-focused buy now-pay later (BNPL) companies fall amid concerns of a potential recession, many investors and fintech startups are redirecting their attention to BNPL for businesses, or B2B BNPL. Businesses, it would seem, are a much more lucrative clientele for BNPL services. But there are high stakes involved and some important considerations for emerging fintechs before diving in.
The insidious fraud threat: Account takeover is the most popular type of BNPL fraud — when an unauthorized user takes over an existing BNPL account and makes purchases. As B2C BNPL took off during the pandemic, so, too, did fraud attempts, growing 66% between 2020 and 2021. There’s no reason to think that B2B BNPL will somehow be different or immune. The only distinction in B2B is that the size of the loans are generally much larger, leaving underwriters (i.e. emerging fintechs) in the position of potentially having to absorb much more bad debt.
As BNPL providers, especially in the business realm where more money is being spent, fintechs are going to need much more sophisticated, secure, reliable authentication methods than simple passwords and even two factor authorization (2FA), both of which are susceptible to phishing. Biometrics such as facial authentication can be a great option, but traditionally these advanced techniques have required significant infrastructure investments and lengthy integrations.
Tightening regulations: In recent weeks, the Consumer Financial Protection Bureau (CFPB) has started to look more closely at the risks of consumer BNPL. For example, the CFPB has recognized that, much like traditional credit cards, BNPL can still get people into financial trouble. With tightening regulation in the consumer realm, fintechs serving this market are going to need to be transparent and rigorous in demonstrating compliance.
Many believe that B2B BNPL won’t be subject to the same level of scrutiny, since the risk of businesses overspending on items they don’t need is considered far lower than consumers. The problem is that the line between many small- and mid-sized businesses (SMBs) — the prime target market for B2B BNPL — and consumers can be blurry when you’re making loans.
SMBs and sole proprietors often rely on personal credit in place of business credit when qualifying for loans, since their businesses may not have sufficient credit history. In this context fintechs need to think of every business owner as a consumer, with their engagements subject to the same regulations.
Extreme competition from all sides: With only about half of SMBs reporting their financing needs are being met, it’s no wonder many fintechs are excited at the prospect of fundamentally changing the way businesses borrow money. But beware that many are thinking the same exact thing you are, meaning an already competitive space is going to get even more competitive.
Fintechs will have to really stand out in order to differentiate themselves as the ideal BNPL partner and provider in a B2B setting. Furthermore, we can expect Big Tech players like Amazon and Google to ramp up their presence in this market that’s estimated to hit $700 billion by 2026. These companies have massive scale and, in the case of Amazon, massive distribution networks which will give them a significant advantage.
In conclusion, while B2B BNPL is an exciting space with hundreds of billions of dollars in potential market share and room for multiple players, making a play in this market can be very risky and complicated. This opportunity needs to be considered as omnisciently and deliberately as possible, and only once you find your niche should you move forward.