How Merchant BNPL is making lives easier for small business owners

Customers and investors were enthusiastic about Buy Now, Pay Later (BNPL) and fintechs like Affirm, Klarna, and AfterPay had seen high valuations and customer inflows globally. Now, Merchant BNPL is becoming mainstream credit for small businesses when they buy from suppliers. Business owners want real-time credit experience that consumers have.

The business-to-business (B2B) market in India is rapidly evolving. According to Forrester Research, India’s retail market was worth an estimated $883 billion last year, with grocery retail accounting for $608 billion. The market is expected to reach $1.3 trillion by 2024. Notably, “mom and pop” stores account for approximately 75% of this retail market, selling everything from groceries to apparel to electronics to daily necessities.

New opportunities

Here are a few emerging trends that will set the wheels in motion for Merchant BNPL:

  • Small business owners are ditching paper and managing sourcing, logistics, and finances digitally, which is making things more efficient. This trend has been accelerated exponentially by the pandemic.
  • Credit at the time of the transaction is becoming a reality. Similar to how UPI made payments simple and real-time, centralized data and API infrastructures such as GSTIN and AA enabled similar merchant financing innovations. It is referred to as ’embedded finance’ when credit is available at the time of the transaction.
  • Electronic payments, ecommerce listings, transactions, ratings, and other digital and reliable data footprints are being generated, allowing for faster underwriting for small-ticket credit.
  • Logistics innovation enables brands to pursue a direct-to-retailer strategy through just-in-time servicing and supply chain fulfillment.

What is Merchant BNPL?

This is a type of short-term credit offered to small businesses when they buy a product or service from their suppliers. The lender pays the supplier in advance, and the loan is typically repaid by the small business owner in 15-60 days. The seller, which could be a brand, distributor, aggregator platform, or digital B2B Marketplace, usually bears the interest for that duration.

This was previously referred to as distributor credit or dealer financing. The fundamental difference is that BNPL, unlike dealer/distributor financing, uses an array of data and the latest technology to enable real-time credit over digital journeys. Furthermore, the average credit amount granted under BNPL tends to be lower at first and increases as borrowers demonstrate good repayment behavior.

As the borrower (in this case, the small business owner) can only use the money to buy from their supplier, it usually carries a much lower credit risk than an unrestricted usage of funds that could potentially be spent for non-revenue generating end-use. Merchant BNPL is also referred to as In-Purchase Financing/ SME BNPL/Shop Now Paid Now.

A win-win situation for everyone

Sellers get the money upfront, retailers get the goods and services without having to pay anything in advance, and lenders get a customer who can be given a larger loan in the future, with a clear volume multiplier effect.

This model connects three key players in a product’s life cycle: the brand/large company/B2B marketplace/seller who wants to reach as many merchants as possible, the merchants who want to buy goods/services on credit, and a lender who wants to offer low-risk credit and gain a customer. Partnerships between lenders and suppliers are critical in creating a smooth and successful checkout journey.

BNPL product companies typically use an embedded financing solution in which the BNPL provider is on the supplier platform, so for the SME, it is another payment mechanism to complete their purchase and obtain credit. As a result, the BNPL provider creates an opportunity to build a white-label platform that can connect to multiple suppliers, which aids in market penetration and, eventually, a more robust lending ecosystem.

Its scope

There are six million MSMEs in India, and each of them requires or will require credit to manage their working capital needs or grow their business. Real-time credit is now possible thanks to the tailwinds of data innovation, digital transactions, and supply chain innovation. Merchant BNPL is the ideal solution for small businesses seeking a digital native credit/checkout experience and their suppliers seeking to increase sales.

Many platforms will emerge in the coming years, and this product will account for a significant portion of short-term merchant credit. The next game-changer for businesses will be a point of purchase financing.

(The writer is Co-Founder,

(The one-stop destination for MSME, ET RISE provides news, views and analysis around GST, Exports, Funding, Policy and small business management.)

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