How U.S.-Israeli startup Behalf fits Visa's B2B strategy
Visa Europe, under its $100 million fintech investment program, has taken a stake in Behalf to give the global card network a way to further its B2B payment strategy with smaller merchants.
Traditionally, banks have neglected the small and medium-sized enterprise lending market in favor of loans to larger companies, because the SME sector isn’t as cost-effective. Virtual cards, for example, are often pitched as a product for large complex organizations that need to share a corporate card account among several employees.
The SME market has the same need, but not the same range of products — of the $300 billion that U.S. SMEs borrow each year, banks supply just $200 billion of the total, according to Visa.
“As an indication of how informal the market is, SME owners’ friends and family are estimated to provide around 50 percent of the remaining $100 billion in financing,” said Bill Gajda, Visa’s senior vice president for innovation and strategic partnerships.
New York- and Tel Aviv-based Behalf provides point-of-sale financing for SMEs making e-commerce purchases from large merchants. Visa will offer Behalf’s SME clients reusable, tokenized Visa virtual cards which give businesses instant loans for their purchases and flexible repayment schedules.
Initially, Visa and Behalf will offer the Visa virtual cards only in the U.S., although they plan to expand their partnership to other markets.
The Behalf investment is the latest in a series of stakes Visa has taken in fintechs such as online consumer finance provider Klarna; Japanese post-pay credit provider Paidy; card issuance platform Marqeta; and corporate payments provider Fraedom (which Visa acquired in February 2018).
Visa is actively positioning itself in the B2B payments space. In June 2017, it launched the Visa Ready Program for Business Solutions, and it is partnering with Billtrust and Wex to improve B2B virtual card acceptance.
In November 2017, Visa launched a pilot of its blockchain-based B2B payments platform Visa B2B Connect with a number of banks around the world, and in January 2018 it formed an API partnership with Latin American B2B payments firm NovoPayment. Using open APIs, Visa B2B Connect facilitates corporate cross-border B2B payments, and is slated to be made more widely available in the first half of 2019, said Visa spokesperson Aida Hadzibegovic.
“What Visa wants to do is to give SMEs flexibility, which makes a huge difference if you’re a small business,” said Visa’s Gajda. “We’re focusing on the emerging area of transactional credit for consumers and for B2B transactions — where consumers using Klarna or SMEs using Behalf make a purchase and decide how to structure the payments at the time of or after the purchase. This could be a delayed one-time payment or structured payments over a set period. Traditionally, bank loans to SMEs are very inflexible and high cost.”
Gajda said that Visa’s investment in Behalf marks the first time it has linked a partner offering transactional credit to its own commercial card program and instant digital issuance.
Behalf’s Visa virtual cards leverage the Visa B2B Connect platform’s open API capability and form part of a broader initiative by the card network involving smart receipts and invoicing following its acquisition of Fraedom, Gajda said.
“Where Behalf differs from other alternative B2B finance platforms, such as C2FO or Fundbox, is its focus on point-of-sale financing, whereas the others focus more on lines of credit and early payment of invoices,” said Steve Murphy, a commercial and enterprise payments analyst with Mercator Advisory Group. “When small-business buyers want to buy goods and services online from a Behalf customer, they get immediate financing to assist with the purchase. So Behalf focuses on this critical ‘buy decision’ interaction.”
Behalf funds loans to SMEs from its own balance sheet, using finance supplied by the Soros Group. It advertises transaction fees that are lower than the cost of accepting credit cards.
“We don’t provide loans from banks, but we have a partnership with FinWise Bank, which provides our banking and payments capabilities,” said Behalf CEO Benjy Feinberg. “Also, we act as the issuer of Visa virtual cards to our users, with FinWise guaranteeing our regulatory compliance.”
FinWise, of Sandy, Utah, is a subsidiary of All West Bancorp.
In February, Behalf secured $150 million in debt financing led by Soros Fund Management. Viola Credit, an Israeli private fund that participated in the debt financing, and a private investment fund managed by Soros Fund Management also made an equity investment in Behalf.
“Behalf’s financing platform is attractive in aiding buyers with their liquidity and cash positioning, which is critical for small businesses,” said Gilles Ubaghs, a senior analyst at Aite Group. “Offering a mix of financing options is helpful to suppliers as it can help drive sales overall, and, through the use of a third party, reduce some of the risks they face.”
Offering virtual card on Behalf’s platform will help Visa gain more virtual card usage via access to Behalf’s existing client base, said Ubaghs.
“This replicates what Mastercard has done in the virtual card space with Comdata,” he said. “Virtual cards are exploding in usage in the commercial card space, and we’ve received anecdotal evidence of banks seeing growth of up to 195 percent in virtual cards. So the competitive pressure to grow overall usage levels is high for what’s effectively still a new product that a lot of merchants and buyers aren’t that familiar with.”