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As Klarna and Affirm falter, a latest breed of ‘buy now, pay later’ startups are stealing the highlight

As the thrill across the “buy now, pay later” trend wears off, some traders are betting they’ve found the following big thing.

Buy now, pay later with firms like Klarna and Confirm, which permit buyers to defer payments or spread purchases into interest-free installments, are under enormous pressure as consumers grow to be more cautious about spending on account of the rising cost of living and better rates of interest raise the associated fee of borrowing. They also face increased competition from the tech giant Apple entering the ring with its own BNPL offer.

But enterprise capitalists are betting that a latest breed of startups from Europe will likely be the true winners in space. Companies like Mondu, Hokodo, and Billie raked in a whole lot of money from investors with an easy argument: firms—not consumers—are the more lucrative clientele within the “buy now, pay later” trend.

“There is a giant opportunity by way of ‘buy now, pay later’ for B2B [business-to-business] space,” said Malte Huffman, co-CEO of Mondu, a Berlin-based startup.

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

While services like Klarna provide credit for consumer purchases – say a latest pair of jeans or a glamorous speaker system – BNPL’s B2B firms aim to settle business-to-business transactions. It differs from another existing types of short-term financing, akin to working capital loans, which cover the day-to-day operating costs of firms, and invoice factoring, where an organization sells all or a part of an account for quicker access to money owed to it.

A latest generation of BNPL startups

scalapayItalyUSD 727.5 million
BillieGermany$146 million
PlayerUnited KingdomUSD 58.4 million
HokodoUnited KingdomUSD 56.9 million
MonduGermanyUSD 56.9 million
TreydSweden$12.3 million

Source: crunchbase

Patrick Norris, general partner at private equity firm Notion Capital, said BNPL’s B2B market is “much larger” than its B2C market. Notion recently made a £40 million investment in Hokodo, UK-based B2B BNPL

“The average B2B basket size is far larger than the typical consumer basket,” Norris said, adding that this makes it easier for firms to generate revenue and achieve scale.

“B2C” players are getting weaker

Shares of major consumer-oriented BNPL players fell sharply in 2022 as fears of a possible recession weighed heavily on the sector.

Swedish Klarna is in fundraising talks at a deep discount to its latest valuation, based on a report Wall Street Journal — to $15 billion from $46 billion in 2021. A Klarna spokesperson said the corporate didn’t comment on “speculation”.

American, listed on the fintech exchange Confirm for the reason that starting of the 12 months, its shares have fallen greater than 75% while stocks Unitwhich bought Australian company BNPL Afterpay for $29 billion, fell 57%. PayPalwhich offers its own installment loan feature, has fallen 60% for the reason that start of the 12 months.

BNPL launched in the course of the coronavirus pandemic, offering shoppers a convenient solution to split payments into smaller chunks with just a couple of clicks on retailer checkout pages. Now firms are following this trend.

“Businesses proceed to struggle with money flow issues in light of deteriorating macroeconomic conditions and the continuing supply chain crisis, so any solution to receive money faster on a versatile basis will likely be attractive,” said Philip Benton, fintech analyst at research firm Omdia.

Mondu and Hodoko haven’t publicly disclosed their valuations, but Italy’s Scalapay and Germany’s Billie were recently valued at $1 billion and $640 million, respectively.

BNPL’s services are particularly popular amongst small and medium-sized enterprises, which also feel the results of rising inflation. According to Mondu boss Huffman, SMEs have long been “underserved” by large banks.

“Banks cannot really reduce the ticket size to make it cost-effective since the margin on the contribution they might get with such a loan doesn’t cover the prices involved,” he said.

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

Recession risk

BNPL’s products have been refused by some regulators on account of concerns that they could push people into debt they can’t afford, and a scarcity of transparency regarding late payment fees and other charges.

The UK is leading the way in which on the regulatory front, with government officials hoping to introduce stricter regulation for the sector as early as 2023. Even so, Norris said BNPL’s business-oriented firms face less regulatory risk than firms like Klarna.

“B2C regulation will provide consumers with much-needed protection and help them shop correctly and avoid debt,” he said. “In B2B, the danger of firms overspending on items they do not need is negligible.”

However, B2B players will must be careful in regards to the level of risk they take. Norris said that with a possible recession on the horizon, the massive challenge for B2B startups BNPL will likely be maintaining high growth while preparing for potential insolvencies.

“B2B will generally be high value, low volume, so naturally risk appetite will likely be higher and affordability checks more necessary,” said Benton of Omdia.

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