Forgot Klara? Buyers depend on “purchase now, pay later”

As the hype surrounding the “buy now, pay later” trend subsides, some investors are betting they’ve found the next big thing.

Buy now, pay later Companies like Klarna and Affirm, which allow shoppers to defer payments to a later date or split purchases into interest-free installments, are under immense pressure as consumers become more cautious about the rising cost of living as higher interest rates lower the cost of borrowing drive up. They also face increasing competition as tech giant Apple enters the ring with its own BNPL offering.

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But venture capitalists are betting that a new generation of startups from Europe will be the real winners in this space. Companies like Mondu, Hokodo, and Billie have raked in heaps of cash from investors with a simple argument: Businesses — not consumers — are a more lucrative clientele for the “buy now, pay later” trend.

“There’s a huge opportunity out there in terms of ‘buy now, pay later’ for B2B [business-to-business] space,” said Malte Huffman, co-CEO of Mondu, a Berlin-based startup.

Huffman, whose firm recently raised $43 million in funding from investors including Silicon Valley billionaire Peter Thiel’s Valar Ventures, predicts the market for BNPL in B2B transactions in Europe and the US will reach $200 billion in the next few years will reach US dollars.

While services like Klarna provide credit for consumer purchases — say, a new pair of jeans or a flashy speaker system — B2B BNPL firms aim to process business-to-business transactions. It differs from some other existing forms of short-term financing such as working capital loans, which cover a company’s day-to-day operating expenses, and invoice factoring, where a company sells all or part of an invoice to gain quicker access to money owed.

A new generation of BNPL startups

Scalapay Italy $727.5 million
billy Germany $146M
player United Kingdom $58.4M
hokodo United Kingdom $56.9M
World Germany $56.9M
Treyd Sweden $12.3M

Source: Crunchbase

Patrick Norris, general partner at private equity firm Notion Capital, said the market for B2B BNPL is “much bigger” than that for business-to-consumer, or B2C. Notion recently led a $40M investment in Hokodo, a UK-based B2B BNPL firm

“The average B2B shopping cart size is much larger than the average consumer shopping cart,” Norris said, adding that this makes it easier for companies to generate revenue and achieve scale.

“B2C” players falter

Shares of major consumer-facing BNPL players have fallen sharply in 2022 as concerns over a possible recession weigh on the sector.

According to a Wall Street Journal report, Swedish company Klarna is in talks to raise funds at a deep discount to its last valuation – from $46 billion in 2021 to $15 billion. A Klarna spokesman said the company does not comment on “speculation.”

US-listed fintech Affirm is down more than 75% year-to-date, while shares in Block, which bought Australian BNPL firm Afterpay for $29 billion, have fallen 57%. PayPal, which offers its own installment loan feature, is down 60% year-to-date.

BNPL launched during the coronavirus pandemic, offering shoppers a convenient way to split payments into smaller chunks with just a few clicks on retailers’ checkout pages. Now companies are also catching on to the trend.

“Companies are still struggling with liquidity amid deteriorating macroeconomic conditions and the ongoing supply chain crisis, so any opportunity to get money faster on a flexible basis will be attractive,” said Philip Benton, fintech analyst at market research firm Omdia.

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Mondu and Hodoko have not publicly announced their valuations, but Italian Scalapay and German Billie were most recently valued at $1 billion and $640 million, respectively.

BNPL services are proving particularly popular with small and medium-sized businesses, which are also suffering from rising inflation. According to Mondu boss Huffman, SMEs have long been “underserved” by big banks.

“Banks can’t really shrink the ticket size to make it economical because the contribution margin they would get from such a loan doesn’t cover the costs involved,” he said.

“At the same time, fintech companies have proven that a more data-driven approach and a more automated lending approach can actually work and expand the addressable market.”

recession risk

BNPL products have been rebuffed by some regulators over concerns that they could push people into borrowing they can’t afford and a lack of transparency around late payment fees and other charges.

Britain has spearheaded the regulatory front, with government officials hoping to introduce stricter rules for the sector as early as 2023. However, Norris said business-focused BNPL companies face less regulatory risk than companies like Klarna.

“B2C regulation will provide much-needed protection for consumers and help them shop smart and stay out of debt,” he said. “In B2B, the risk of companies overspending on items they don’t need is negligible.”

However, one thing B2B players need to be wary of is the risk they are taking. With a potential recession on the horizon, a major challenge for B2B BNPL startups will be maintaining high growth while preparing for potential bankruptcies, Norris said.

“B2B is generally going to be high value and low volume, so naturally there will be higher risk appetite and affordability testing will be more important,” Omdia’s Benton said.

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