In late August, payments juggernaut PayPal announced their new product 'Pay-in-4'. The Buy Now, Pay Later (BNPL) adoption was unexpected for many and sent the ASX BNPL 7 into shock. Afterpay's share price dropped over 20% in the two weeks following.
But is PayPal's entry into the already crowded BNPL space detrimental to the current leaders? History suggests not, as recognised by our experts. PayPal's experience in the BNPL arena has previously fallen short, which is unknown to many. Further, PayPal's entry may just give its smaller counterparts the push they have been waiting for. In part two of this Collection, I asked our three experts what effect PayPal's entry will have on Buy Now, Pay Later.
Responses come from:
- Emanuel Datt, Datt Capital
- Jun Bei Liu, Tribeca Investment Management
- Dushko Bajic, First Sentier Investors
They've failed once, will they fail again?
Emanuel Datt, Datt Capital
We don't expect that the dynamic of the BNPL space will change a great deal given the entrance of Paypal into the sector. What is not commonly known is that Paypal have previously attempted to break into the space on numerous occasions, first rolling out a BNPL product called Paypal Later in 2010. This product was not successful and was withdrawn after a short period. In 2016, Paypal tried entering BNPL once again with an instalment extension to a product known as Paypal Credit, which was effectively a short-term lending facility. This was again withdrawn after a short period, but was resurrected in September 2020; no doubt attracted by the roaring success of Afterpay.
Paypal is best known as a payment processor. We do note that there are vast differences in competencies between payment processing and the BNPL sector. For example, credit risk management in the payment processing field is fairly broad brush when it comes to the transaction level; whilst in the BNPL sectors each transaction is generally assessed at a relatively granular level. This has historically been Paypal’s downfall in their past experiences and it will be interesting to see if they are agile enough to compete in the space.
The benefits of PayPal
Jun Bei Liu, Tribeca Investment Partners
PayPal has certainly had an impact on the share price of the sector. First of all, PayPal is a very large payment system and it's certainly not something to be dismissed, but last year, PayPal released another version of Buy Now, Pay Later, but it didn't quite work out. Now they have relaunched another one, which is at a significantly lower cost, and hopefully it can capture some of the market share.
If you take a step back, Buy Now, Pay Later is a very new industry. Afterpay only moved in 18 months or two years ago. The penetration of this service is very, very low. If anything, PayPal's offering is going to drive more awareness and adoption of this service.
The large players who have already signed up a lot of retailers and have consumers using their platforms will be the ones who benefit. Yes, it is a threat, but it is just a demonstration of the proliferation of this space and it, in turn, will drive traffic back into the market leaders.
PayPal brings great validation
For a payments juggernaut like PayPal to enter, we think it brings great validation to the BNPL industry. This is not PayPal’s first foray into instalments. However this time around, the proposed product (‘Pay in 4’) is more akin to the key BNPL players, which really validates this particular model that has been doubted by many.
PayPal charges anywhere between 2.6-2.9% for the service, and the ‘Pay in 4’ product will be offered to merchants with no additional costs. Given BNPL fees average around 4%, PayPal’s entry may stimulate more discussions around price. However, intensive pricing discussions are not new to the BNPL industry given the number of new players. We believe retailers are more focused on partnering with a BNPL provider that can offer a valuable customer network rather than squeezing out a couple basis points of fees.
On that note, we think PayPal faces several hurdles in its BNPL product launch. Firstly, customer engagement will be crucial. PayPal has generally been an ‘after-thought’ in a consumer’s purchase cycle – a means to an end – which will need to be improved in order to invigorate better spending metrics in its customer base. Secondly, a great proportion of retailers will demand an omni-channel solution to enhance customer engagement from online to in-store. PayPal has historically been an online offering and is yet to bring a greater presence offline. Lastly, it will be interesting to see the route PayPal takes in financing the product and managing credit risk as it will dictate the adoption of the product and impact the customer experience.
It seems like PayPal's past may be haunting them. Regardless of the impact of the juggernaut on the Aussie BNPL stocks, one thing these fundies can agree upon is that the effect will not be detrimental. With Afterpay's share price starting to rally, some might argue that the worst is behind us... but if we've learnt one thing from BNPL, it's that you never know what's around the corner.
In the next instalment of this collection, I ask the experts what they're looking for in a BNPL company, and what is critical to a company's success. Ensure you're following my profile by clicking FOLLOW to be updated when this wire is posted.
You can access part 1 of this Collection, Is there still opportunity in the BNPL space? here
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Excellent article on a sector specific topic. Look forward to more like this.
Would be helpful to note if any of the experts are current holders of BNPL stock...
This article misses the point. Paypal has invested heavily in Mercardolibre, which is the most popular platform of its type in South America and now entering Europe. One of the offshoots of Mercadolibre is Mercadopago which is a fintech which is the payment platform so feared by mainstream banking and companies like as it offers quotas as well as interest-bearing accounts. Afterpay and similar platforms could well be toast as Paypal roles out this Mercadolibre technology.
Sounds like it was written with a certain degree of bias? I agree with Geoffrey's comments below. It would be incredibly unwise to play down PayPal's entry into the BNPL space. They have incredibly deep pockets, a huge customer and merchant base, as well as a long established reputation and great team to back all that up. On the other hand, I'm not sure it will necessarily spell the end for ZIP, Afterpay, Humm, Laybuy and so on... However it seems a large enough threat to severely impact important growth markets, which are much larger than the ASIA Pacific region. BNPL is merely a stepping stone for the fintech sector.
Japan already offers BNPL at the point of transaction on credit card purchases, both online and in store. Has done so for decades now. Have you not heard of this? Or just ignoring? Once Visa and Mastercard enter the market it's game over for Zip/Afterpay/etc.
Thanks Jack! Glad you enjoyed it.
Thanks Justin, the experts will be talking about their analysis of specific BNPL stocks in the next upcoming wire in this collection.
The path to success is through failure, I see other contributors note the size of Paypal. I wouldn't write off their past failures so quickly. A good outcome would be that it expands the whole BNPL market and erodes credit card spending.
It's kind of funny to see people saying Mastercard and Visa will end the BNPL. Clearly you you don't understand the user demographics of the service.
Nice work Bella. Just what I was looking for!
Spot on Evan. Most BNPL users don't even have a credit card. Paypal is an interesting one though, it's definitely widely used by younger people, but more out of necessity than love of the service. I've never heard someone gush about how good Paypal is, but plenty of Afterpay users will sing its praise.