The crowded Australian buy now pay later (BNPL) sector is about to get even more crowded.

US-based Affirm, which is Afterpay’s (ASX:APT) biggest competitor in the US, announced last week it was preparing registrations to enter the Aussie market.

It has indeed been a very busy period for the BNPL sector, with new platforms being launched almost every other week since the Square-Afterpay deal was announced in August.

In the past month alone, we’ve seen Citibank launch its new BNPL platform Spot, CBA with StepPay, and Suncorp went live with PayLater.

Whilst all these platforms focus on the B2C (business to customer) side of the market, there’s the other side that has seemingly been overlooked, one that could be worth trillions of dollars.

According to David Price, CEO of unlisted BNPL provider Bizpay, the B2B (business-to-business) segment of the BNPL market could be worth $50 trillion, easily dwarfing Afterpay’s current sales of $21bn.

Bizpay is a BNPL company that allows small to medium-sized businesses pay their invoices in four instalments.

“There’s over $50 trillion of invoices processed in one year globally, and $4 trillion in Australia alone, which is more than our GDP,” Price told Stockhead.

Bizpay focuses on servicing the invoices of professional services clients such as legal, accounting, and recruitment firms.

“If we took just one recruitment firm such as Randstad, which does $40 billion in annual sales globally, and won all of their invoices, that would be billions of transactions with just one client,” he added.

Price said the average transaction in the B2B segment is also much higher than in B2C.

For example, Afterpay’s average transaction size is just $160, while Bizpay’s is $17,000, which is 100x larger. This allows a B2B provider to build up large transaction volumes very quickly.

“In addition to being larger, our average customer is also using us for at least three transactions a month, or around 30 times in a year.”

This compares to Afterpay’s average customer, which is only using the service eight to ten times a year on a much smaller basket size.
 

Faster organic growth for B2B players

There are other reasons why Price thinks that B2B is a much more sustainable business model for the BNPL sector than B2C.

First, he believes that BNPL is a cash flow smoothing tool, as opposed to a credit product.

Most surveys indeed show that the biggest problem a small to business medium-sized business faces is cash flow management.

“Businesses need a smoothing product. It makes more sense to spread a $17,000 invoice over four repayments than a $160 transaction for an individual,” he said.

He also thinks that a B2B model allows for a more organic growth, as it could branch out much quicker.

“If you think about a B2C model, it goes from business to consumer, and there’s nowhere to go beyond that.”

‘Our AI engine monitors how long potential customers look at our penalty clauses and terms and conditions. If they look at them for too long, that would be a red flag for us’

In a B2B model however, there is an opportunity to branch out and accelerate organic growth.

In this model, Price said that Bizpay could go the next level down and reach out to the end customer’s own suppliers, and ask them if they wanted to use its BNPL services.

“So we could go from one service provider to multiple service providers very quickly through that referral mechanism.”

So is Bizpay’s business model the same as that of Greensill, which collapsed in spectacular fashion recently?

Not according to Price.

He says there are fundamental differences between the Greensill and Bizpay business models.

“Firstly Greensill played on very big transaction sizes with high concentrations at the larger end of town,” Price explained.

Secondly, Greensilll didn’t have the model of instalment payments for the end client.

“Unlike Greensill, Bizpay gives our clients the option to pay in four monthly instalments instead of the normal 30 days.”

 

Risks ahead and IPO

Price believes the B2B model could even have a lower credit risk than a standard B2C model.

Before lockdowns, he said Bizpay’s bad debt was zero, but since then it had to write off around 0.1% of the portfolio.

Its arrears rate, which is the standard industry measure, was at 1.1% but increased to 3.6% after lockdowns were announced.

Afterpay and Zip (ASX:Z1P) show similar arrears rates, but Price believes it would be much harder to chase smaller debts.

“You can’t chase $160 or $300 of late payments, not legally anyway because it doesn’t make financial sense.”

“On the other hand, if we have a debt of $15,000 or $30,000 we could enforce it.”

Asked if Bizpay would run into regulatory obstacles, Price said the B2C model would have more to worry about.

“Commercial lending to businesses is not regulated in Australia,” he said.

Afterpay has more of a regulatory risk, according to Price, because business to consumer lending is highly regulated.

He says that Bizpay does the credit checks anyway mainly through its artificial intelligence technology.

Some of the things its AI engine looks at sound ridiculous, but the AI technology has worked well for the company.

“For example, our AI engine monitors how long potential customers look at our penalty clauses and terms & conditions. If they look at them for too long, that would be a red flag for us.”

That kind of checks has allowed the company to make credit decisions without having to look at any financial information, Price explains, making transactions quicker.

Bizpay is planning an ASX listing in the middle of next year, after raising $45 million so far. The company is also expecting to raise around $100 million in the IPO round.

“The opportunity is to capture tens of billions of dollars in invoice transactions, which is not a big proportion of the market,” Price said.

“Our biggest problem will eventually become, how do we get enough money to fund the business.”

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