- The use of Buy Now, Pay Later has increased among consumers in recent years, owing to a substantial surge in B2C e-commerce since the start of the COVID-19 epidemic.
- New regulations introduced by the EU Parliament seek to protect consumers from over-indebtedness caused by small loans and Buy Now, Pay Later solutions.
- The B2B sector’s demand for invoice and installment purchases is just as high as in B2C. However, unlike in B2C, where BNPL can lead to a potential debt trap, B2B BNPL provides an opportunity to drive growth.
At the beginning of December 2022, the European Parliament agreed on new rules to protect consumers from over-indebtedness. The new regulations were prompted by the increasing use of small loans and installment purchases in online shopping, through which consumers can quickly and easily fall into debt.
Online invoice and installment purchases, known as Buy Now, Pay Later (BNPL) payment methods, offered by payment service providers such as Klarna (Sweden), Paypal (USA), Affirm (USA) and Afterpay (Australia) are particularly popular with young shoppers. Consumer credit guidelines now in place are intended to ensure smooth interactions between credit markets and a high level of consumer protection.
New EU law: More transparency, stricter credit checks
New EU laws will make it mandatory for credit companies to ensure the creditworthiness of buyers before concluding a credit agreement. This is intended to prevent irresponsible lending in the interests of consumers. Credit providers or brokers that are not banks will have to undergo a licensing procedure and registration and submit to ongoing monitoring by independent authorities.
In addition, credit advertisements, similar to cigarette packets, will also have to carry a warning label clearly stating that a loan costs money. At the same time, there will be a cap to prevent consumers from being charged excessive interest rates or fees. Consumers will have the right to revoke a credit agreement within 14 days without giving any reason. They will also be able to repay a loan early and reduce the total cost of the loan.
Why are these rules needed right now?
Experts are currently observing two trends that increase the risk of over-indebtedness: First, the Corona pandemic has led to a significant financial burden for many people, as recent surveys show. The pandemic hit young people between the ages of 18 and 25 particularly hard: 49 percent of respondents in this age group reported losses in income. Even now, consumers are struggling to cope with the reduction of income resulting from job losses and are having to cut back financially.
This situation is intensified by rising prices for energy and food. According to Schufa, a large proportion of people in Germany do not have sufficient reserves to cover rising costs. Although the savings of private households increased in the last years, the sum is spread over a small number of households. Many people have already felt the impact of rising prices: the number of households without any savings has increased from 25 to 30 percent in the past year, according to ING’s Economic & Financial Analysis.
Schufa is already sounding the alarm: at the end of 2022, it recorded a 20 percent increase in payment difficulties among consumers compared to the previous year.
At the same time, the importance of e-commerce continues to grow. During the lockdown, people increasingly ordered online, significantly growing online trade. In 2021, online sales in Germany increased by around 19 percent to 99.1 billion euros, according to the e-commerce association BEVH. With the increasing success of e-commerce, payment methods such as online invoices and installment purchases are also experiencing higher demand.
BNPL payment methods allow people to shop online and defer payment until a later date. According to a survey by the Federation of German Consumer Organizations (vzbv), around 37 percent of all online shoppers have placed at least one order by invoice or installment purchase in recent months. This form of mini loan is particularly popular among young people, as the Schufa Risk and Credit Compass 2022 shows. A survey by Bitkom e.V.s found that the most popular BNPL method was purchase on account with a 14-day payment period.
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28 percent of over-indebted people in Germany have debts arising from e-commerce.
Source: Statistisches Bundesamt
The omnipresence of BNPL has made it much easier to get into debt as consumers can quickly lose track of their purchasing behavior. A survey by Capterra found that 14 percent of respondents have used a BNPL payment method because they didn’t have the money to buy what they wanted at the time of purchase. And there’s another problem: bills often can’t be settled by the payment deadline. According to Birkholz, head of Schufa, 40 percent of users have failed to pay an invoice and received a payment reminder. Only 22 percent said they had forgotten to pay – the rest did not have enough money to pay the bill.
Payment providers usually charge additional fees when payment deadlines are pushed back, which can lead to an additional financial burden. Accordingly, fast, frictionless financing without sufficiently checked creditworthiness is a danger for consumers that has been increasing in recent years: According to the Federal Statistical Office, in 2021, around 28 percent of people in debt in Germany owed money to online retailers. In the future, this danger is to be minimized with the help of consumer credit guidelines.
Why BNPL in B2B e-commerce is different
The demand for BNPL in the B2B sector is comparable to that of B2C. In fact, invoice and installment purchases have long been the sought-after payment methods in the B2B sector. Yet the usage and impact of these methods could hardly be more different.
Business customers who use BNPL solutions for online shopping enjoy the same flexibility as private consumers but are not exposed to the same risk.
The buying process in B2B is significantly different from private purchases. Several people in a company plan and decide purchasing decisions, usually over a long period. Only after the decision-makers approve the budget do the responsible persons place an order. As a result, spontaneous purchases which exceed a budget are exceedingly rare.
In addition to the buying process, buying intention is also different in B2B. Typically, everything purchased must serve the company’s general interest and not just the impulse of a single person. BNPL solutions are used in particular for purchases essential for a company’s success – be it to maintain day-to-day business operations or enable growth.
Driving business growth
BNPL plays a decisive role in the process optimization of a company. On the one hand, purchasing with payment terms or in installments enables a company to stabilize its cash flow without forgoing relevant purchases. Companies can invest in high-quality products or services and postpone payment until a later date.
Second, with a payment processor specializing in B2B payments, B2B buyers experience the same convenience and flexibility they are accustomed to from private online transactions – an experience that over 80 percent of all B2B buyers desire.
When buyers purchase online for their business, they often face extended wait times. Invoice payments must sometimes be requested via email, which is followed by a manual review and approval process that can take several days. BNPL payment methods from providers such as Mondu, on the other hand, are integrated directly into the checkout of a B2B web store, enabling a fast and smooth purchasing process. If carried out, the credit check runs in real time in the background. Providers such as Mondu achieve an acceptance rate of over 90 percent. This means BNPL is immediately accessible to almost all B2B buyers.
Since order sums in B2B are often significantly higher than in B2C, payment flexibility is also relevant here – especially in times of crisis. Companies can choose between the various payment options, depending on what best suits their financial and structural situation: Invoice purchases can be settled within 30, 45, 60 or 90 days, while installment purchases can be split into 3, 6 or 12 monthly payments. Buyers can either transfer the payment by bank transfer on a date of their choice within the payment period or have the invoice amount collected from their account as a SEPA direct debit on the specified date.
Invoicing and collection are also handled by the BNPL provider. This means that B2B buyers receive the invoice reliably and promptly after placing the order and are reminded regularly of the upcoming payment deadlines. Even if B2B buyers have selected direct debit as a payment option, they receive an email reminding them about the forthcoming payment collection.
As a result, with a BNPL provider, invoice and installment purchases are completed seamlessly and efficiently, goods are ready for shipment faster, and businesses can generate revenue in a timely manner. The payment option, payment term and method of invoice settlement can be flexibly selected, enhancing the e-commerce buying experience of B2B buyers.
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