In Vietnam, this model was pioneered in the market by startups such as Fundiin, EasyGop,... and is gradually being applied by big players in the market such as banks, or MoMo e-wallet.
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In this article, ThinkZone will go through the following contents in turn:
➤ How does the "Buy now, pay later" (BNPL) model work?
➤ The benefits that BNPL brings to sales businesses (merchant)
➤ Does the BNPL model bring bad debt risks to merchants?
➤ Is there a BNPL for B2B e-commerce?
How does the "Buy now, pay later" (BNPL) model work?
Adding "Buy now, pay later" (BNPL) in addition to available payment methods at stores and retail businesses means that customers have another payment option in the form of installments. But unlike traditional credit cards, in which consumers borrow from the bank to buy things, with BNPL, consumers borrow from the BNPL company to pay the seller.
For example, customer A buys a $100 item from store B, using company C's BNPL payment method, then A will usually pay $25 in advance, and company C pays B $75 at the time A purchases the goods, meaning C pays $75 to B on A's behalf. Then A will gradually pay $75 to C through payment installments, and absolutely no interest will arise if paid on time.
So what benefits does "Buy now, pay later" (BNPL) bring to sales businesses?
The "Buy now, pay later" (BNPL) model brings many different benefits and contributes significantly to helping small merchants improve and grow. Some possible benefits include:
1. Promote sales
Consumers feel more comfortable and have less financial pressure when they can save costs and distribute the payment process over a long period of time instead of having to pay immediately for large orders. Of course, there are some customers who still choose to save enough money before making a purchase. However, in today's life, customers tend to prefer receiving immediate results rather than saving in traditional forms. Therefore, with the "buy now, pay later" (BNPL) model, when financial pressure is reduced, the purchase conversion rate will increase, leading to a higher average value per order for the seller, increasing sales.
2. Improve relationships and increase consumer brand loyalty
As financial pressures decrease, BNPL companies will become “top-of-mind” choices when consumers intend to make a purchase, thereby increasing the likelihood of customers returning.
Photo source: Getty Images
3. Full payment “immediately”
Unlike installment payments through banks (usually with a minimum term of 3 months to 1 year), the BNPL model allows customers to pay in shorter installments, usually divided into 3 - 4 installments per month. This helps customers buy the product immediately without financial pressure and the seller also earns "immediate" profit from that product instead of waiting for interest rates for a quarter or a year like bank installments. Overall this is a win-win relationship, bringing immediate benefits to both buyer and seller.
Photo source: numbeos
MoMo, one of the most used e-wallets in Vietnam, has also applied the BNPL model with the "Postpaid Wallet" service, with 3 spending limits: 1 million, 3 million and 5 million with 3 monthly payment deadlines including the 5th, 10th and 15th of the following month after purchase.
4. Balance competitiveness
It can be seen that the BNPL model is booming and has been widely applied by many merchants, increasing competition disproportionately because customers will tend to choose to buy in places with less financial pressure. Or simply put, customers may prefer to shop elsewhere if the business does not apply the new model that competitors are using.
Of course, there are many factors to increase a business's market competition such as product quality, customer service, facilities, geographical location... But in general, product price is one of the prerequisite factors for customers to make purchasing decisions, and this "buy now, pay later" model is doing a very good job of creating opportunities for businesses to compete on product prices.
Does the BNPL model bring bad debt risks to merchants?
Although using BNPL brings many benefits to both consumers and businesses, it is still a loan after all. Of course, borrowing will come with bad debt risk, and this risk belongs to BNPL companies, not to merchants (because BNPL companies advance money to pay merchants and collect from buyers later).
For consumers using this form, it is necessary to carefully plan their purchases in accordance with their expected personal income and expenses. As for businesses, it is important to calculate expected revenue and profits to ensure that they do not spend beyond their means.
As analyzed in the article “Analysis of the Buy Now, Pay Later (BNPL) model”, the key problem of this model is controlling the risk of bad debt of consumers. BNPL companies will usually only make a profit when the user has completed the final payment, so they must always find ways to evaluate the user's credit score to limit bad debt.
Some options are being widely used by companies such as cooperating with banks or telecommunications companies to synthesize and analyze customer data (transaction history, phone top-up,...), analyze app usage behavior, track payment history and block bad users,...
In general, the risk management problem is the biggest problem of the BNPL model, and solving the problem well is a decisive factor for the success and long-term stable development of BNPL companies.
Is there a BNPL for B2B e-commerce?
With B2C, BNPL is gradually becoming a preferred payment method for many consumers; What about B2B e-commerce?
Thinking a little, we can see that the need for BNPL in B2B sales is completely well-founded: if a retail business lacks capital to buy inventory needed for peak occasions such as Christmas or Tet,... it may need the BNPL model to reduce financial pressure when importing goods, so that after the sale ends during the peak season, the business can make a profit and comfortably pay off the loan and at the same time not worry about paying interest.
Although currently in Vietnam there is no BNPL model for B2B e-commerce, in the world there have also appeared a number of BNPL companies targeting B2B sales, such as Billie (from Germany, valued at $640 million), Hokodo (from the UK, raised $16 million in capital), good Tillit (from Norway, raised $3 million in capital). However, BNPL companies targeting the B2B market have not yet reached the scale of BNPL "giants" in B2C such as Klarna, AfterPay, Affirm.
Photo source: Edge Commerce
So what is the reason why the B2B e-commerce field is not really fertile ground for BNPL companies? Some reasons explaining the situation include:
➤ With B2B, the relationship between seller and buyer is much more complicated than with B2C. B2B sales contracts often take a lot of time to negotiate, with many special terms for each retailer/supplier. These special terms often also include content about late payment, which already has the essence of "buy now, pay later" in it, so there is no need for another BNPL company.
➤ Also because B2B sales contracts are complicated, the system for tracking and managing payments is also complicated. This is very different from the uniform payment nature of B2C sales.
➤ B2B sales contracts are often of great value, accompanied by the risk of loss if large bad debts occur, while data on retailers' credit scores is not easy to find (because it is related to the retailers' business ability). The problem of risk management for BNPL companies for B2B sales is not easy to solve, and solving it also takes a lot of effort.
➤ Along with the large scale of B2B sales contracts, the amount of capital that BNPL has to advance to suppliers is huge compared to B2C sales, causing extreme pressure on the amount of capital required and debt recovery.
➤ With all the above inconveniences and challenges, profit margins in B2B sales are often not high (due to wholesale), leading to the discounts that BNPL companies recover to offset the above costs are quite meager.
With all the above analysis, we can see that the main problem does not lie in market demand but in the operation of the business model. Let's see how BNPL companies targeting B2B e-commerce will handle this problem.
SUMMARY
Through this article, ThinkZone has compiled the benefits and risks of applying the BNPL model to B2C e-commerce, along with many challenges that prevent this model from developing strongly with B2B sales.
However, it cannot be denied that BNPL is a breakthrough model, strongly innovating the sales process, a win-win for both B2C merchants and consumers. However, BNPL companies need to especially consider the problem of risk management of bad debt to ensure sustainable, long-term development when applying this model.
Reference:
https://gocardless.com/en-au/guides/posts/how-does-buy-now-pay-later-affect-your-business/
https://www.paymentsjournal.com/is-buy-now-pay-later-right-for-b2b/