jan 21, 2022
The massive lending revenue opportunity in B2B
Rohit sharma

In this post, let's deep dive into the economics and tradeoffs of the various fintech monetization models available for B2B platforms. Imagine a business platform called Flourish that helps flower shop owners manage their entire business. Flourish is a business in a box for flower shops. Bloombay, a flower shop in San Francisco's FIDI district, is a representative customer of Flourish. Bloombay's owners and staff use Flourish to run their entire operation. They use Flourish to purchase flowers from their suppliers, accept customer orders, and manage the delivery of those orders.

In a previous post, we outlined why access to working capital and growth capital rank at the top as challenges for businesses such as Bloombay. Flourish has a unique opportunity to help Bloombay solve this problem. Bloombay trusts Flourish to manage all its operations. As a result, Flourish has a unique and verified view of how Bloombay is performing as a business. For example, Flourish understands how quickly Bloombay turns its inventory. It deeply understands the demand patterns of its customers, details such as how many customers order what type of flowers? It also has a comprehensive view of the margin economics of the business on a SKU by SKU basis.

Additionally, Bloombay's owners use the Flourish software every day, making them a highly engaged customer. This makes Flourish the ideal distribution point for offering a loan product to Bloombay. They have Bloombay's attention and all the data to make getting a loan a friction less process. In contrast to this simple process getting a loan via traditional channels is a multi-day affair. As a result, Bloombay is more likely to engage and stick to Flourish as its core software stack.

Flourish also benefits from offering loan products to Bloombay. At its core, they are solving a core customer problem that enables Flourish to differentiate against its competition. This is also a growth driver for Flourish. With the new growth capital that Bloombay gets via Flourish, it can buy more inventory and grow its business. As Bloombay grows, it uses the flourish platform more, i.e. there is a natural growth loop. Thirdly lending can be a great revenue driver for Flourish. Let us dig deeper into the revenue opportunity in lending.

There are two main revenue sources in the lending transaction: origination fees and interest income, both paid by the borrower. Borrowers are typically charged an origination fee ranging from 3% to 9% of the funded loan amount. This fee covers all the costs associated with producing the loan for the lender, such as data costs and legal fees. Every loan has an interest rate associated with it, i.e., the cost of borrowing that money over time. This interest income is the other source of income for the lender. On average term loan interest rates are 6% to 25% in the US. For example, for a 12 month $100K loan at 8% with a 3% fee. The income opportunity = $3k (fee income) + $4386 (interest income)= $7,386. This equates to a margin of ~7.4%. To illustrate the revenue opportunity, we have a handy calculator that you can play around with and test out your assumptions.

The other monetization avenue available for Flourish is payments primarily monetized via interchange revenues (card payments) and markups on core banking rails (ACH and Wires). Payments are monetized on a per transaction basis. Flourish can provide a card (debit or charge) to Bloombay to enable them to make payments to its suppliers. The core use case for Bloombay is convenience as they can see all their payments instantly sync to Flourish, as Flourish provided the card and is deeply integrated. Flourish benefits as it obtains revenue via interchange and increases its customer retention.

Card networks have three significant constituents, the network itself (Visa, MasterCard, Discover, and Amex), the issuer (typically a bank), and the acceptor. When Flourish provides a card to Bloombay they are on the issuing side of the transaction. Interchange rates, on average, are ~2.6% which the receiving merchant pays. In this case, the suppliers whom Bloombay pays with the flourish card bear the 2.6% cost. However, the entire interchange revenue does not accrue to the B2B platform. The whole infrastructure and ecosystem around credit card payments take about half of the interchange; thus, the platform typically ends up with ~1.3%.

Similarly, flourish can also offer Bloombay the ability to accept credit payments from its consumers on the platform. Bloombay becomes the merchant in this use case, and the 2.6% interchange comes out of its pocket. This is the acceptance use case for Flourish. Again the use case for offering payment acceptance is deep integration and convenience. For Bloombay everything syncs instantly into Flourish, and they can manage their operations smoothly. For payment acceptance, Flourish could charge a markup and earn some revenue, and this is typically a tiny chunk (~30-50bps). Most platforms can only earn this revenue on a large scale; it is effectively the spread between what the payment processor charges and what you can charge the customer.

Thus on average, margins on payments are about 1.3%. Therefore, payments are a low margin, high volume revenue generator as compared to traditional lending. Lending has a significantly higher margin (3% or more). While some businesses may benefit from payment features, all businesses benefit from access to capital. We believe that the fintech lending use case provides the best services to the business customer: convenience, access to capital, additional revenue streams, and an environment that fosters business success

Rohit Sharma

Rohit is co-founder at Kanmon, an embedded lending infrastructure startup that enables software platforms offer financial services to their customers. He has deep operational and strategy experience in fintech via roles at Plastiq (GM) and Fundingcircle (VP Product)

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