As Klarna and Affirm falter, a new breed of ‘buy now, pay later’ startup is stealing the spotlight

With promotion on the “buy now, pay later” trend FadingSome investors are betting they’ve found the next big thing.

Buy now, pay later like Klarna and Voice, which lets shoppers defer payment to a later date or split purchases into interest-free installments, are under extreme stress as consumers become more careful about spending due to rising cost of living, and higher interest rates. Rates drive up the cost of borrowing. they are also facing increased competitionwith tech giants Apple Entering the ring with his BNPL offering.

But venture capitalists are betting that a new breed of startups from Europe will be the real winners in the space. Companies like Mondu, Hokudo and Billy’s have siphoned cash from investors with a simple pitch: Businesses — not consumers — are the more attractive customers to buy now, pay later the trend.

“Buy Now, Pay Later” There’s A Huge Opportunity For B2B [business-to-business] space,” said Malte Huffman, co-CEO of Berlin-based startup Mondu.

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

While services like Klarna extend credit for consumer purchases — say, a new pair of jeans or an attractive speaker system — B2B BNPL firms aim to settle transactions between businesses. This differs from some other existing forms of short-term finance such as working capital loans, which cover a firm’s everyday operating costs, and invoice factoring, where a company bills all or part of a bill for faster access to the cash it owes. sells.

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

“The average basket size in B2B is much larger than the average consumer basket,” Norris said. This makes it easier for firms to generate revenue and achieve scale.

Sweden’s Kallarna is in talks to raise funds at a steep discount to its final valuation wall street journal – From $46 billion to $15 billion in 2021. A Klarna spokesperson said the firm does not comment on “speculation”.

Stateside, a publicly listed fintech Voice Its stock has seen a decline of over 75% since the start of the year, while shares of blockThe company, which bought Australian BNPL firm Afterpay for $29 billion, has fallen 57 per cent. paypalWhich offers its own installment loan facility, is down 60% year-on-year.

BNPL took off in the coronavirus pandemic, providing shoppers a convenient way to split payments into smaller pieces with just a few clicks on retailers’ checkout pages. Now, businesses are getting into the trend.

Philip Benton, fintech analyst at market research firm Omdia, said, “Businesses are still facing cash flow issues in light of the deteriorating macroeconomic situation and the ongoing supply chain crisis, so there is no way to get fast funding on a flexible basis. The method is also appealing.”

Mondu and Hodoko have not publicly disclosed their valuations, but Italy’s Scallope and Germany’s Billy were valued at $1 billion and $640 million, respectively.

BNPL services are proving to be particularly popular with small and medium-sized enterprises, which are also feeling pinched With rising inflation. According to Huffman, the head of Mondu, SMEs have long been “underserved” by large banks.

“Banks can’t really reduce the ticket size to make it affordable because the contribution margin they would get from such loans does not cover the associated costs,” he said.

“At the same time, fintech companies have proven that a more data-driven approach and a more automated approach to credit can really make it work and expand the addressable market.”

the UK charge led On the regulatory front, the sector is expected to introduce stricter regulations in early 2023 with government officials. Still, Norris said business-focused BNPL companies face less regulatory risk than firms like Klarna.

“Regulation in B2C is going to provide the much needed protection to consumers and help them make smart purchases and stay out of debt,” he said. “In B2B, the risk of businesses spending more on items they don’t need is negligible.”

However, one thing B2B players need to be careful of is the level of risk they are taking. Norris said that with a potential recession on the horizon, a major challenge for B2B BNPL startups will be to maintain high growth while preparing for potential bankruptcy.

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