Last Updated: February 2022
Hi it’s Martijn from HPE Growth. I am investing Series B and C European start-ups in verticals including FinTech, Climate Tech, SaaS, and Digital Health. My articles uncover the emerging fintech trends in the European tech ecosystem. Today I am sharing a piece on the BNPL space in Europe 🇪🇺
Buy now, pay later (BNPL) is part of the greater embedded lending family which is currently undergoing a strong transformation. It is an alternative to traditional credit payments. BNPL allows individual consumers and businesses to make a purchase and receive the good and pay at a later date in the future (the name kind of gives it away...). In other words, BNPL is a short term interest free loan. The cost of payment is usually divided into a series of instalments or according to some payment terms. In the B2C space, the number of instalments usually revolves around 3 to 4 instalments as shown by Scalapay and Klarna, respectively. The payment plans are typically interest free and late fees can be charged depending on the BNPL provider. In the B2B space, the number of instalments better known as payments terms are typically based on the number of days. For example, Billie’s payment terms range from 14 to 120 days whereas Biller’s terms are set in 30 day intervals ranging from 30 to 90 days (according to the website).
Fun fact: Biller (Dutch pre-seed startup) announced on the 1st of February 2022 that they were acquired by the Banking Circle for a rumored EUR 100 million 🚀 The company was only founded nine months ago 🍼
Imagine that you are the owner of small dental practice and are in need of the dental chair which can cost upwards of EUR 10,000 (some retailers don’t even offer free shipping at that price...). Nevertheless, you have identified the exact model offered by the merchant and added the product to the shopping basket. One of the payment options offered by the merchant is a BNPL solution from a B2B BNPL player like Billie and you decide to choose that option as it provides greater flexibility for your cash flow. You are redirected to the BNPL service provider and asked to sign up (the onboarding process for businesses takes only 7 minutes...) or you can sign in if you are already a customer. After signing in, the BNPL player performs an instant know-your-customer (KYC) check and an automated credit risk assessment by pulling all data available from sources such your bank account, credit agencies, firm demographics (e.g. legal entity) and accounting data of your dental practice enabling your company to get a decision instantly on whether you qualify for the selected payment option. Once the credit check has been successfully completed, the expensive dental chair excluding shipping costs is delivered to your practice and you are required to make the payments according to the payment plan meeting your needs. For a visual representation, see the process below.
Source: Medici
However, it is important to note that BNPL players differ in terms of the process. Some providers (e.g., Hokodo) perform eligibility checks prior to customers selecting BNPL as their preferred payment method. Hereby, they prevent potential buyers being unsatisfied if they are refused to use BNPL as their payment method.
But what happens if you are unable to pay the invoice? Does the BNPL provider incur the cost? This is the moment in which trade credit insurers such as Euler Hermes and Atradius can come into play. Trade credit insurers cover the risk of invoice defaults that BNPL providers face when the BNPL provider offers trade credit to a merchant. Besides that, trade credit insurers monitor the risk and collect the debt of the end customer. However, they are not a prerequisite as providers can decide to rely on their internal risk engine (e.g., Mondu)
Disclaimer: the diagram above is for illustration purposes and does not infer any contractual working relationships among the companies.
Consumers benefit from BNPL through:
As a result, the boom in consumers choosing BNPL as a payment method is not surprising. Consumers can decide themselves whether they pay back in 2, 3, or 4 instalments. Despite being a user of BNPL myself, I tend to agree with the increasingly expressed concerns that BNPL is just another form of debt and that consumers purchase goods and services via the payment method that are less affordable than when they would when the full amount is paid immediately with their own money. Only time will tell whether this type of consumer credit will become increasingly regulated.
On the other hand, merchants benefit from offering BNPL to consumers and businesses through: