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Payments and finance for B2B marketplaces – build versus embed?

Anil Stocker
March 17, 2022
min read
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Online marketplaces are looking to improve their customer payments processes. But should they build their own solutions or embed third party applications?

When one of America’s most famous venture firms, Andreeson Horowitz, proclaimed in January 2020 that “every company will be a fintech company”, it spurred a big debate. How much should software platforms build their own solutions, versus embedding third party fintech applications at relevant trigger points to drive sales growth and customer loyalty?

Here at Kriya we’re working with a number of business-to-business (“B2B”) marketplaces to allow them to offer more seamless payment and credit options for their trade buyers and suppliers. Having been around for 12 years, processing £26 billion of B2B payments and advancing over £3.4 billion in credit to suppliers and buyers, we feel we’re in a good position to explain the benefits of partnering with an embedded finance platform rather than trying to go it alone.

One size doesn’t fit all in B2B payments

While many consumer applications rely on integrated debit and credit card payment options, for many B2B transactions this default option doesn’t work. Yes, some micro-businesses might use cards for small transactions, but depending on your sector, there will be a number of different ways a business buyer wants to pay. Some will insist on payment terms (e.g. pay on 30 or 60 days via BACA/CHAPS) as that's what they've had offline in the past. Others might want to set up a direct debit spreading payment instalments, while others still might want an escrow service where funds only get released when delivery is made and quality is checked. Recent developments in Open Banking will make bank-to-bank transfers and scheduled payments more common and seamless than in the past.

Integrating all these various payment methods yourself requires technical and operational bandwidth that takes up time. By working with Kriya, you’ll be able to integrate with our single API that orchestrates all these various payment options via one consolidated dashboard and reporting tool. Moreover, given we have deep partnerships with the payment processors, we’ll be able to unlock better rates than what you would get if you went directly.

Credit models take time to build and refine

Knowing which buyers you should give payment terms to, and which ones you should insist pay up front is a credit decision that requires a risk framework. Many marketplaces get into trouble by trying to give all buyers long payment terms but then also pay their suppliers as fast as possible. Securing the supply side is vital for marketplace growth and if you can’t guarantee them stability in payments they will quickly look elsewhere. Having a “float” of cash in your business to ensure suppliers get paid on time when you’re chasing buyers to pay eats up valuable working capital and in the extreme can cause early stage marketplaces to go out of business.

This is where fintechs like Kriya can help significantly, as we have a ten-year-old risk model that can offer credit limits and payment terms to all your buyers, which are adjusted dynamically over time. As buyers build up more of a track record of paying on time, credit terms are adjusted upwards and longer times to pay are permitted. Importantly, Kriya also brings the finance to enable instant-supplier pay-out, which locks in a happy supplier base, while you offer "Pay Later" to your buyers. All the while your marketplace doesn’t have to commit resources and try to catch up in this difficult domain.

Raising debt finance is a journey that only gets more demanding

Some marketplaces we’ve come across sometimes consider whether they should be raising structured finance facilities to power their own credit to customers. Indeed, some asset managers and banks are willing to do financing deals to provide liquidity to marketplaces once they’ve reached a larger scale.

The problem with these more traditional financing facilities is that they come with significant costs, including legal fees, arrangement and set up fees, and most importantly equity contribution to take “first losses”. This means that marketplaces need to use a portion of their equity fundraising to park capital into special purpose vehicles for the benefit of the “senior” lender who wants to see skin in the game from the marketplace. This parked equity can’t then be used to grow the marketplace operations or customer acquisition and acts as a drag on valuation as future venture investors won’t really see the high return they require on this equity.

In addition, further burden comes during the life of the facility with ongoing reporting requirements and the obligation to “cure” (i.e. pay for) any defaults above expectations on the facility. This all requires investments in personnel to manage all these requirements and ironically the more successful your gross sales growth the more finance you’ll need to raise which only exacerbates the friction outlined above.. Ultimately this will throw sand in the wheels of your growth plans.

Kriya specialises in the activity of raising wholesale funds, having already been on this journey the past ten years raising billions and therefore accessing a lower cost of capital than marketplaces would be able to achieve on their own. By simply plugging in our infrastructure, buyer and supplier credit scales effortlessly with your marketplace transaction volume, allowing you to focus on the core work of product development, customer acquisition and logistics.

What do you want your brand to stand for?

Finally, building your brand will become a key consideration for marketplaces as you look to attract and retain more users and drive more transactions. By making payments, credit, financing and collections an inhouse activity you risk associating your brand with finance and this might detract from the top brand you are trying to build. Would you want your brand associated with managing customer credit limits or chasing up collections for late payments? Or does integrating an embedded finance player like Kriya provide a neutral third party to manage inevitable situations where buyers or suppliers don’t get exactly the terms they want all the time. It also signals to your users that you are focusing on your core competencies while working with experts to deliver best-in-class embedded finance to improve the overall experience beyond what a marketplace would be able to deliver themselves.

In conclusion, it comes down to what’s core and what’s non-core to a marketplace on their scaling journey. There are many things to get right in building a marketplace and adding the huge workload and time commitment of offering inhouse payments, credit and collections to your to-do list will slow everything down. What's more, you can capture all the benefits of embedded finance by simply integrating with one simple API. Configuring this will take your team weeks rather than the many months if not years getting all these building blocks in place yourself.

In our view, the statement “every company will be a fintech company” really means the most forward looking marketplaces will know how to integrate and collaborate with the next generation of embedded finance APIs to deliver their users huge financial benefits. And they’ll do this with just a few clicks to turbocharge their growth and customer experience.

If you'd like to find out more about how we're helping B2B marketplaces offer better credit and payments options, get in touch today. For more insights on the B2B eCommerce space follow our LinkedIn page.

B2B Payments to boost your growth

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