Deferred payments in the era of B2B e-commerce

In his book Debt: The First 5,000 Years, anthropologist David Graeber explains how the practice of extending credit to trading partners is as old as civilization itself. Paradoxically, however, in recent years, as more and more business purchases have moved online, that age-old practice has been interrupted. 

Even as B2B e-commerce has grown to account for 35% of all purchases at large and mid-sized companies¹, most e-merchants simply haven’t been able to create the capability to offer customers the option to defer their payments. Instead, they require web customers to pay upfront for goods and services directly at checkout, usually by card or bank transfer.

However, with the development of a new wave of digital deferred payment solutions, e-merchants are increasingly able to provide the kind of net terms that have long been the hallmark of traditional commerce. Indeed, they are finding that the ability to offer such a credit facility is fast becoming a game-changer in competitive B2B landscapes.

So, what is online payment deferral? And how does a deferred payment work in a B2B e-commerce world?

Online deferred payment may be simple to define but its application in a B2B e-commerce setting requires the careful selection of the right model and supportive technologies if it is to be put into practice safely and successfully.

In effect, online deferred payment is an arrangement between a supplier and its web customers in which customers are provided with credit on agreed terms so they can acquire goods or services immediately and pay for them by a set date. Such a ‘grace period’ typically extends to 30, 60, or 90 days, with payments either staged over the period or settled in full by its end. In some cases, that credit is provided for free; in others, it incurs interest or a fee. 

On the surface, such online transactions mimic traditional B2B payment arrangements. But there are some clear differences when they move online, with two standing out.

Decisions on offering terms have to be made in real-time:
To offer deferred payment online, e-merchants need a reliable means of deciding whether or not to extend credit to a customer as they move through web checkout – an instant assessment of the trustworthiness of the customer and how much credit it is safe to offer them and on what terms. And that takes real-time access to comprehensive, global intelligence on the financial health of buyers.

The risks of extending credit are greater for sellers online:
E-commerce opens up markets so that orders can come from customers who are completely unknown to your organization and who can place orders from territories where you may have little or no trading experience.

The need for such credit financing is becoming more evident by the day as B2B customers increasingly value the user experience, the speed, and the convenience of well-designed, secure e-commerce websites. The B2B e-commerce market is expected to grow at a compound annual rate of 18% from around $8 trillion in 2023 to $27 trillion in 2030.² But it’s not just a question of greater transaction volume; the amounts that B2B customers are willing to spend online is also rising fast. 

A recent survey of large and mid-sized businesses by management consultancy McKinsey & Company confirms that online and remote channels are no longer reserved for low-value purchases. Almost two-thirds of B2B decision-makers are now willing to spend more than $50,000 through digital self-service or remote online interactions.¹

However, even as customers are increasingly ready and willing to spend big online, the potential is being limited by a lack of payment options, with the majority of e-merchants still viewing the provision of online deferred payment as either too difficult or too risky to undertake. 

 But that is changing fast with the emergence of a new wave of credit solutions:

• Digital trade credit platforms are proving to be the answer for many companies, with process automation making the offer, approval, and managing of credit financing fast, safe, and efficient. 
  As an online customer checks out, their creditworthiness is assessed in real-time, allowing the e-merchant to offer an appropriate credit limit and payment terms. As the order is completed, the digital trade credit company pays the seller the full transaction amount minus a fee, while taking on responsibility to collect on any future non-payment. 
• The business practice of invoice factoring – where a business sells batches of invoices to a finance company, typically for 80-90% of their value, and the lender takes on responsibility for collection – is also being digitally transformed to support deferred payments. By offering, say, 30-day terms to online customers and then factoring the resulting invoices, suppliers can tap into the value of the online sales immediately. But the practice comes with some downsides, including the frequent requirement to lump invoices from trusted customers in with those from less reliable payers, and the association of invoice factoring with companies that are experiencing cash flow problems. 
• The highest profile of all the new online deferred payment options is, without doubt, B2B Buy Now, Pay Later (BNPL). Similar to the highly popular consumer model but with crucial differences to reflect the higher volume and size of transactions, the B2B version combines cutting-edge BNPL platform technology with real-time customer grading, e-commerce insurance, and financing options so e-merchants can offer their customers instant purchases. As customers check out on a supplier’s e-commerce site, their creditworthiness is checked in real-time by linking to a comprehensive database of company information which generates a score and allows the supplier to fix appropriate terms. As the transaction is completed, a financing partner can provide the payment in full to the e-merchant, with the risk of non-payment covered by e-commerce credit insurance.
  So, what is an example of a deferred payment option when enabled by B2B BNPL? The market leader in trade credit insurance, Allianz Trade, offers a package that integrates state-of-the-art BNPL platforms from partners such as Two, in3 and PausePay with its commercial information base of more than 80 million companies worldwide to provide real-time checks on the creditworthiness of customers. Partnerships with major finance companies means the seller can be paid instantly, while Allianz Trade pay protects the transaction against non-payment.

The appeal of such online deferred payment options is not lost on B2B buyers. Different estimates suggest that between 30% and 50% abandon their orders at checkout having found out that the only option was to pay by card.⁴ Other research shows that 90% of potential customers check the seller’s payment options before they embark on a purchase.⁵

The benefits are similar to those of classic invoice financing. Buyers can source goods and services without having to make upfront payments in full. That improves their cash flow management, boosts their purchasing power, and enables them to fund larger orders. The big difference is that the process happens in seconds, rather than the days that it might take to verify a buyer’s credit status and to fix terms in a traditional offline setting.  

For suppliers embracing online deferred payments for the first time, the advantages are just as evident. When implemented effectively, online deferred payment solutions – with their high levels of automation – can streamline payment processes and workflows, reducing administration overheads. Automatic processes, such as real-time creditworthiness checks, also mean faster decision-making and new customer onboarding.

Sellers can also expect higher conversion rates, fuller baskets at checkout, higher sales volumes, enhanced customer loyalty and retention, and an overall gain in competitive edge. Moreover, with the inclusion of accurate and global checks on creditworthiness, sellers can also be confident that the expanded global footprint offered by e-commerce won’t be accompanied by higher risk of non-payment.

Given the documented benefits, many suppliers are now exploring solutions that will help them offer online deferred payments. But to ensure success, they are looking for a seamless integration of the required capabilities:

• Comprehensive and instant access to intelligence on buyers to assess their creditworthiness and determine suitable terms
• Close partnerships with finance companies to ensure payments to suppliers can be made immediately at online checkout
• Trade credit insurance to ensure any risk of default on payment terms is covered
• Seamless integration of these capabilities with the supplier’s e-commerce systems and other enterprise applications.

Deferred payment plans, however, are not a one-size-fits-all solution. They can be tailored to suit the specific needs of B2B e-merchants in different industries, geographies, buyer-seller relationships, and typical deal sizes. 

For example, Allianz Trade pay provides a Credit Terms Only option to sellers who don’t need immediate payment for a purchase but still want to offer their buyers net terms. Merchants connect the Allianz Trade API to their e-commerce applications but don’t use the facility of a finance partner. If a customer fails to pay after the agreed term, Allianz Trade steps in to collect and ensure the supplier doesn’t lose out.

As well as attracting new customers, online deferred payment options foster deeper, more fruitful relationships with existing customers. 
By implementing the facility for customers to defer payments online, over 90% are likely to be offered payment terms. And early adopters of the BNPL solution provided through the partnership between Allianz Trade and platform vendor Two report conversion rates of up to 40% ⁶, with sellers seeing a jump in customer order value of 60% on average.⁷

With those benefits now evident and businesses keen to shift an ever-larger proportion of their purchasing online, there is pent-up demand for deferred payment solutions from both buyers and sellers. The different models available – from digital trade credit to B2B BNPL – already represent compelling propositions to many e-merchants. In other words, the ability to offer deferred payments online is becoming not just a competitive advantage but a competitive necessity.