PayPal Enters Installment Lending Business Targeting Fintechs Affirm And Afterpay


Point-of-sale financing — the modern layaway that lets you pay for a new TV or dress in four installments instead of putting it on your credit card — has grown in popularity significantly over the past couple of years, and the pandemic is propelling it to new heights. Australian company Afterpay, whose entire business is bet on the scheme, has gone from a market valuation of $1 billion in 2018 to $18 billion today. Eight-year-old San Francisco startup Affirm is rumored plan an IPO that could raise $10 billion. Now PayPal

pile up in space. Its new “Pay in 4” product will allow you to pay for all items costing between $30 and $600 in four installments over six weeks.

Pay in 4’s fees set it apart from other “buy now, pay later” products. Afterpay charges retailers around 5% of each transaction to offer its funding feature. It doesn’t charge the consumer interest, but if you’re late on a payment, you’ll pay a fee. Affirm also charges retailers transaction fees. But most of the time users pay 10-30% interest and there are no late fees. PayPal seems to be a cheaper hybrid of the two. It won’t charge the consumer interest or additional retailer fees, but if you’re late on a payment, you’ll pay a fee of up to $10.

Serial entrepreneur Max Levchin has launched two of the top three players offering online POS financing in the United States. He co-founded PayPal with Peter Thiel in 1999 and launched Affirm in 2012.

PayPal can undercut competition on fees because it already has a dominant and highly profitable payment network that it can leverage. Eighty percent of the top 100 retailers in the US allow customers to pay with PayPal, and nearly 70% of US online shoppers have PayPal accounts. PayPal charges retailers a per-transaction fee of 2.9% plus $0.30, and in the second quarter, as Covid-19 skyrocketed online shopping, it posted record revenue of $5.3 billion. dollars and profits of $1.5 billion. Its stock has exploded, adding $95 billion in market value over the past six months. In an economic environment where e-commerce is booming, “PayPal can grow 18-19% before you get up in the morning,” says MoffettNathanson analyst Lisa Ellis.

Data from Afterpay and PayPal shows that consumers spend more money, sometimes 20% more, when offered point-of-sale financing options. When PayPal launches Pay in 4 this fall, it’s likely to see transaction sizes increase, and since it’s already earning 2.9% on every transaction, its fee revenue will grow in tandem.

The online point-of-sale financing market now has millions of US customers. Afterpay, which expanded to the United States in 2018, has 5.6 million users. Affirm also claims to have 5.6 million. Based in Stockholm Klarna9 million, and based in Minneapolis Sezzle has at least a million.

Independent of Pay in 4, PayPal has offered point-of-sale financing for over a decade. He bought Baltimore startup Bill Me Later in 2008 and renamed it PayPal Credit in 2014. PayPal Credit lets consumers apply for a lump sum line of credit and has millions of borrowers today. Like a credit card, it charges high interest rates of around 25% and requires monthly payments. These consumer loans can be at high risk of default, and PayPal doesn’t own most of them — it offloads US loans to Synchrony Bank. (In 2018, Synchrony acquired PayPal’s huge portfolio of US consumer loans for about $7 billion.)

Last spring, as the pandemic spread rapidly and concerns grew about consumer defaults, PayPal clamped down on lending. “Like many installment lenders, they basically stopped lending in March or early April,” MoffettNathanson’s Ellis said. “Square

did the same. Doug Bland, senior vice president of PayPal, said, “We have taken prudent and risk-responsible action.”

Along with Pay in 4, PayPal’s new push into loans is an indication that the company is getting more aggressive in a volatile economy where many consumers have fared better than expected so far. Unlike PayPal Credit, PayPal will house these new loans on its own balance sheet. Bland says, “We’re incredibly comfortable managing the credit risk associated with this.


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