Is PayPal too late to the BNPL party?

  • By Christine St Anne

PayPal’s latest buy now, pay later product may only be available in the US but with merchant reach that dwarfs its BNPL competitors, its latest foray could have wider implications for the sector. 

Recently PayPal announced that it would launch Pay in 4 – as the name suggests a product that allows people to pay in four interest-free instalments. 

So how well is PayPal positioned in a growing BNPL market?

According to RFi Group data, PayPal is a highly trusted brand as 53 per cent of consumers that are aware of PayPal trust PayPal completely. 

Perceptions of PayPal being secure is also a key driver of usage. 

In comparison, 20 per cent of consumers aware of Afterpay completely trust Afterpay. 

“The strong brand and associations with trust and security, as well as customers being familiar with PayPal as an online payment option, are likely to help PayPal in its foray into BNPL,” RFi Group deputy general manager Kate Wilson said. 

Given this brand recognition and its global reach, it would not be surprising if Pay in 4 is rolled out in other regions. 

UBS believes PayPal’s shift into BNPL could be a “significant turning” point for the sector. 

Crunching the numbers, UBS has PayPal at 346 million users with 26 million merchants globally, generating US$790 billion of total payment volume over the last 12 months.

“Its entry into 'Pay in 4' in the USA could be a significant turning point,” UBS analyst Tom Beadle said in a client note.

...with 26 million active merchants globally, PayPayl’s merchant reach is roughly 500 times that of AfterPay and 900 times that of Zip, Tom Beadle, UBS 

And while the BNPL sector is increasingly crowded, Beadle notes that the marginal cost of Pay in 4 might only equate to 10 basis points of PayPal’s total payment volume, “implying that only minimal volume uplifts are required to 'break-even' even assuming moderate cannibalisation”. 

Beadle adds that with 26 million active merchants globally, PayPayl’s merchant reach is roughly 500 times that of AfterPay and 900 times that of Zip.

However, he notes this comparison could be a little unfair given that both AfterPay and Zip’s average sales per retailer is higher than PayPay.

But the breadth of merchant reach PayPal has does highlight the challenges these Australian BNPL businesses now face to win the “long tail of smaller merchants as well as larger merchants not yet on their platforms, given PayPal’s offering is significantly cheaper and requires no additional integration”. 

For Morningstar analyst Brett Horn, the world of payments is a scale business, and this is one of the advantages for PayPal.

The US-based analyst notes that a business like PayPayl will mostly “roll with” with a payment trend like BNPL which is likely to become the norm.  

“If it is a growing segment in Australia, it’s not surprising that PayPal would like to participate in this growth.’ 

PayPal already offers installment type services in Europe. 

“My big picture takeaway from this is that installments as a payment option is a given but ultimately payments are a simple business. It is a processing industry,” Horn said. 

“It is also a scale-driven industry. If a business like PayPal is able to offer an additional services [like BNPL] that also seems to be the standard in some countries, then it is an attractive option for them as it allows the business to pick up additional volume. 

“The goal for these companies is just to maximize the volume running through that platform, because that's how you win in the end.” 

In terms of how a diversified global firm like PayPal is positioned against dedicated BNPL provides like Afterpay, Horn sees Pay in 4 as a “small extension” of a natural platform. 

“It’s a relatively easy strategy for them to adopt. Businesses like PayPal are always going to keep an eye out on what works. If you have an innovation, it’s just a matter of time before everyone else jumps on it.”