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BNPL: From the next unicorn to the survival of the fittest

Hokodo’s founder and CEO Louis Carbonnier explores how BNPL firms can make it through uncertain times.

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Throughout the last few years, fintech funding has been in abundance. Now, with the cost of living crisis, interest rates rising, and the UK economy heading into recession, VCs and other investors are being much more careful about where they spend their money.

Q2 of 2022 saw the lowest fintech investment of the last five quarters, with figures down 39 per cent from the peak of Q4 2021. Year-on-year, the sector experienced a 32 per cent reduction in investment globally. This means that, rather than splashing cash and trying to become the next unicorn, fintech businesses will have to focus on a much more basic but equally challenging goal: surviving a period of economic uncertainty. For businesses that lend money as part of their value proposition – such as BNPL providers – this will be even tougher.

What will this look like for the B2B BNPL market? Initially, we can take some cues from the B2C arena, and the rise of Klarna.

Maximise geographic coverage and market penetration

Klarna is one of the biggest BNPL players in the world and it has become so successful for a number of reasons, not least of which are the lending giant’s geographic coverage and market penetration. 

Klarna works with 450,000+ retailers and is responsible for millions of transactions in 45 countries, and it’s reached that level largely because it was one of the earliest digital BNPL providers. While the in-store market was well established, almost to the point of saturation, when Klarna took to the internet in 2005, it was an industry pioneer. 

While it was greeted with scepticism by some, it plugged a gap in the online purchasing market and was quickly embraced by digital retailers and consumers alike, enabling rapid scaling across multiple territories. This speed of growth and reach, probably more than anything else, has secured Klarna’s place as a leader in the market. 

Today, all B2B BNPL providers are at a much earlier stage in their development journey than Klarna is. However, from Klarna we can learn that those with a large geographic footprint and a cohort of high-quality merchant and marketplace partners will be in a better position to survive than those who are confined to one or two geographies or who rely on just a handful of merchants for their revenue.

However, as Klarna has also shown, size and reach aren’t always enough to make a business infallible. With recent redundancies and a significant devaluation, Klarna finds itself in a difficult position.

Provide an end-to-end solution

By bringing your end-to-end tech, credit and analytics stack in-house, you are removing the reliance upon third parties for things like credit checks. This means that you can provide a better, faster, and more robust solution to merchants and buyers, putting your business ahead of the competition and removing external productivity threats. Maximising the uptime and minimising the latency of your solution will result in happy buyers and sellers, improving your chances of survival.

Work closely with your merchant partners

Too many BNPL providers offer a one-size-fits-all solution. If you can produce a highly configurable solution and work with your merchant partners to create something that works for them, you are more likely to not only attract new merchants but to secure their loyalty. 

From fashion wholesalers and food manufacturers to freight forwarders and industrial suppliers, B2B merchants and marketplaces can vary significantly. You need to be able to provide a B2B payments solution that is capable of answering the unique needs of each of your merchant partners.

Invest in credit underwriting and fraud prevention

During the pandemic, digital fraud increased by 33 per cent, and there is a clear historical precedent of increased fraud during a recession. B2B BNPL providers need to protect themselves and their merchant partners with a robust credit underwriting engine and fraud risk team. Without this, you will not be able to take on large exposures or provide a sustainable offer rate.

The next couple of years are going to be tough for all sectors of business, fintech included, and we may, unfortunately, see some of the weaker BNPL players exit the market. However, despite their current issues, giants like Klarna will likely survive, thanks largely to their geographic reach and savvy infrastructure. 

Still, they will likely have to pivot their offering in order to satisfy an increasingly knowledgeable audience of consumers. As for the B2B market, we may see some consolidation as the leading players compete for dominance.

Despite the tough times ahead, leaders in the BNPL space will continue to scale their operations into new markets and verticals, ultimately helping them to survive both this current period of uncertainty and any that are still to come.

The views and opinions expressed are not necessarily those of AltFi.

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