What risks to watch for with the buy now, pay later trend

Buy now, pay later (BNPL), a trend that originated in e-commerce, has exploded in the B2C space. The spread has become so pervasive that many retailers are now incorporating technology into their in-store payment experience. While COVID-19 accelerated this trend with brands like Peloton on big ticket items, I've seen BNPL trickle down to brick-and-mortar purchases as inexpensive as my $8 pet treats. 

With a global scale of $125 billion in 2021, it is easy to see why brands are using BNPL approaches to target the B2B e-commerce space as well. While the pandemic turbo charged e-commerce adoption, firms have continued to allocate more significant portions of their distribution plans to e-commerce channels.

Changes in buyer behavior and demographics, combined with increased global interconnectedness fueled by web-based sales, are shaping strategies for sellers of all sizes. For these sellers, BNPL can either be provided by a third-party partner or be the digital extension of a company's internal manual credit processes, though both internal and external solutions share a common set of risks. 

What are those risks? What do they look like? And what should sellers keep in mind to better understand the risks and opportunities inherent in BNPL? Let's dig in. 

Understanding the risks 

An important consideration for sellers in the B2B BNPL space to keep in mind is that buyers actually begin their purchasing decisions with an expectation to pay at checkout, rather than an expectation of net terms. This makes it crucial for BNPL processes to be nearly as easy, if not just as easy, as a credit card or ACH checkout journey. Consequently, sellers' buyer identification and credit decision mechanisms must be easy, accurate, and immediate. 

Too much friction in the process can lead to cart abandonment and lost sales opportunities, while too little accuracy will lead to high losses through fraud or poor credit decisions. However, both are not mutually exclusive and can be achieved with seamless customer experiences and robust governance and lost control mechanisms. While these risks certainly aren't new to the trade credit insurance industry, the speed at which these risks must be assessed is increasing exponentially. 

Getting started: the fundamentals of BNPL

The first step in any BNPL process is knowing who is going to be paying for the goods or services; after all, human interactions are the cornerstones of B2B sales channels -- but the dynamics of engaging one another have shifted in an increasingly digital-centric, platform-driven economy. The fundamental process is the same: buyers contact sellers to request a quote and sellers prospect for new clients. What's new, though, is that trade shows and industry events are now one of many settings and channels through which sales are transacted. It was much easier to know who your client was when you had frequent correspondence, office visits, and other physical interactions. 

That potential disappears when a new-to-you company lands on your website. The anonymity factor is now a barrier to many organizations seeking online sales; it is also a risk that a good insurance partnership mitigates. For any insurer, it's critical to provide a robust buyer identification system via application program interface (API) to help policyholders cross-reference buyers against both external identifiers and data in real time. Cross-referencing data provided by the buyer against the database of the insurer is key to mitigating buyer identification fraud, while still providing a low-friction onboarding journey. 

The impact of real-time decision making

Manual credit processes often require hours, if not days, to gather data and make decisions. In e-commerce applications, buyers want to know they can pay in 30, 60, or 90-days at the time of order, not two or three days later. To drive a more seamless customer experience, providers should use API connections to front-end web portals and back office systems. This allows credit insurers and their policyholders to share data in real time and provide answers for the extension of credit terms in milliseconds. 

API-based policies can even be configured to provide coverage on a smaller initial transaction, while a larger credit line is being considered by the insurer and their client. Additionally, third-party BNPL providers, as well as merchants selling directly on their own website, can benefit from safe sales expansion, in addition to real-time alerts when a potential client may not actually be credit-worthy. Different user experiences can be presented based on a matrix of credit decisions allowing as many opportunities as possible to safely complete a new sale.

Digital solutions empower better customer relationships

BNPL providers and online merchants require bespoke digital solutions to address their unique digital needs. Carriers must adapt to a digital reality that anticipates and responds to the new realities governing policy structures and customer relationships. A significant portion of B2B e-commerce is non-recurring revenue. A customer may make one purchase from a website and not return for months, if ever again.

The historic basis of established credit limits does not accurately reflect buyer behavior or seller needs in the BNPL ecosystem. Carriers must explore additional ways to anticipate new and emerging risks, as well as internal decision making, if they are to remain competitive in the BNPL space. A carrier's internal systems should support the cutting-edge needs of the BNPL industry. Likewise, policy management teams must have a "tech-first" priority. While a two to three day response time on a credit limit may have been sufficient in the past, real-time solutions need real-time answers and reliable technology partners.

The offering of trade credit extends back to the ancient Egyptians and Sumerians. The concept of buying now and paying later is nothing new to the B2B space or to credit insurers; what is new is the need to provide immediate and reliable coverage with as little friction as possible.