New buy-now-pay-later fad runs old-school risks
08/12/2022 11:41
(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Karen Kwok
LONDON, Dec 8 (Reuters Breakingviews) - The
buy-now-pay-later industry is on the rocks, with
consumer-focused lenders like Klarna and Affirm AFRM.O
tumbling in value over the past year. But that hasn’t deterred
venture investors, who are now throwing their weight behind
companies like Wayflyer, which lend to small businesses instead.
There may be a big pool of potential borrowers, but there’s
often a good reason these businesses can’t get money elsewhere.
Pay-later players traditionally offer quick loans to
consumers to buy clothes online. They charge a small fee to the
merchant, allowing shoppers to pay back the full cost over time.
Business-focused pay-later startups are similar, but they serve
companies. An e-commerce group, for example, could borrow from
Wayflyer to buy stock for its online store, and pay the money
back when it sells the goods. The startup, valued at $1.6
billion in February, might typically lend $400,000 for six
months at a 4%-5% fee. It funds the loans by tapping credit
lines provided by banks like JPMorgan JPM.N and Credit Suisse
CSGN.S .
It’s a business model that has got venture capitalists’
pulses racing. They’ve poured $2 billion of equity funding into
pay-later companies that serve businesses in 2022, according to
Dealroom. Other players include SoftBank Group-backed 9984.T
Clearco, Barclays-backed BARC.L Kriya, and Billie, which has a
partnership with Klarna. Even older financial-technology groups
like Britain’s Funding Circle FCH.L are getting in on the act
by launching similar offerings of their own.
But it’s not an entirely new idea. Financing companies’
supply chains is a business that’s as old as banking, while
established players like Citigroup C.N and HSBC HSBA.L ,
0005.HK have giant trade-finance divisions. The pitch for the
upstarts is that they can serve companies more quickly and reach
smaller borrowers that the big banks don’t. Data provider
PitchBook reckons pay-later players could potentially address a
market for small business-to-business payments that’s worth $700
billion in Europe alone, and which is currently often
intermediated by paper cheques and invoices.
The biggest challenge will be managing credit risk. One of
the most prominent recent players that claimed to be a digital
trade-finance pioneer was Greensill Capital, which collapsed
after lending to dicey borrowers. Pipe, a U.S. company that
lends to other startups by taking a claim against future
revenue, may have run into trouble after lending to
cryptocurrency miners, TechCrunch reported, citing sources.
It’s hardly inevitable that the new breed will repeat past
mistakes, and Wayflyer’s default rate in the first nine months
of the year was low at 1% of total loans. But grabbing business
that banks have eschewed probably means taking on more risk. And
the structure of loans adds another potential issue. At
Wayflyer, repayments can be sized in proportion to the
borrower’s revenue, which means the lender gets its money back
more slowly if the business is struggling. The merging of
pay-later services and trade finance raises both new and old
dangers.
Follow @karenkkwok on Twitter
CONTEXT NEWS
Buy-now-pay-later startups serving businesses have raised $2
billion so far in 2022, according to data provider Dealroom.
(Editing by Liam Proud and Oliver Taslic)
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