Point-of-sale financing – the modern layaway that allows you to 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 two years, and the pandemic is propelling it to new heights. Australian company Afterpay, whose entire business is involved in the program, has gone from a market valuation of $ 1 billion in 2018 to $ 18 billion today. Eight-year-old San Francisco-based start-up Affirm is planning an IPO that could bring in $ 10 billion. Now PayPal
Pay in 4’s fees make it different from other “buy now, pay later” products. Afterpay charges retailers approximately 5% of each transaction to provide its fundraising feature. It doesn’t charge the consumer interest, but if you’re late on a payment, you’ll have to pay a fee. Affirm also charges transaction fees to retailers. But most of the time, it charges users 10-30% interest, and it doesn’t have late fees. PayPal appears to be a less expensive hybrid of the two. It won’t charge the consumer interest or additional fees to the retailer, but if you’re late on a payment, you’ll have to pay a fee of up to $ 10.
Serial entrepreneur Max Levchin has launched two of the top three players in online point-of-sale finance in the United States. He co-founded PayPal with Peter Thiel in 1999 and started Affirm in 2012.
PayPal can reduce fee competition because it already has a dominant and highly profitable payment network that it can leverage. Eighty percent of the top 100 U.S. retailers allow customers to pay with PayPal, and nearly 70 percent of U.S. online shoppers have PayPal accounts. PayPal charges retailers a 2.9% per transaction fee plus $ 0.30, and in the second quarter, as Covid-19 skyrocketed online shopping, it posted record revenue of 5.3 billion of dollars and profits of $ 1.5 billion. Its stock has swelled, 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 Lisa Ellis, analyst at MoffettNathanson.
Data from Afterpay and PayPal shows consumers spend more money, sometimes 20% more, when offered point-of-sale financing options. When PayPal launches Pay in 4 this fall, it will likely see transaction sizes increase, and since it already earns 2.9% on each transaction, its fee income will grow along with it.
The online point-of-sale financing market today has millions of US customers. Afterpay, which expanded to the United States in 2018, has 5.6 million users. Affirm also says he has 5.6 million. Stockholm-based Klarna, 9 million, and Minneapolis-based Sezzle, have at least one million.
Apart from Pay in 4, PayPal has been offering point-of-sale financing for over a decade. It bought Baltimore-based startup Bill Me Later in 2008 and renamed it PayPal Credit in 2014. PayPal Credit allows consumers to apply for a lump sum line of credit and now has millions of borrowers. Like a credit card, it charges high interest rates of around 25% and requires monthly payments. These consumer loans can present a high risk of default, and PayPal doesn’t own most of them – it transfers US loans to Synchrony Bank. (In 2018, Synchrony acquired PayPal’s massive US consumer loan portfolio for around $ 7 billion.)
Last spring, as the pandemic spread rapidly and concerns over consumers’ default to repay their loans grew, PayPal put the brakes on lending. “Like many installment lenders, they basically stopped extending loans in March or early April,” MoffettNathanson’s Ellis said. “Square
With Pay in 4, PayPal’s new push into lending is an indication that the business is becoming more aggressive in a volatile economy where many consumers have fared better than expected so far. Unlike PayPal Credit, PayPal will host these new loans on its own balance sheet. Bland says, “We are incredibly comfortable managing the credit risk of this situation. “