PayPal enters BNPL market with Pay-in-4 offering
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Competition is heating up in the red-hot BNPL sector with American online payments company PayPal’s new Pay-in-4 service in the US seen as a strong rival to other deferred payment providers.
Swiss investment bank UBS called PayPal’s move “a significant turning point” as its two key concerns for the BNPL sector have been risk of competition and regulation.
“With PayPal launching a Pay-in-4 service product expected in Q4, following Shopify’s partnership with Affirm, we believe this could lead to significant competitive pressures over coming years,” UBS said in a research note.
The new Pay-in-4 service comes at no extra cost to its merchants, whose fee to PayPal is about 2.4 per cent, and is free to customers who pay on time.
The new service is available for customer purchases of between $US30 and $US600 and can be met in four instalment payments over a six-week period at zero interest.
PayPal said it was building on its history as an originator in the BNPL space with Pay-in-4, and providing flexibility to consumers and for merchants a tool to drive sales and loyalty.
“In today’s challenging retail and economic environment, merchants are looking for trusted ways to help drive average order values and conversion, without taking on additional costs,” PayPal’s senior vice president for global credit, Doug Bland, said in a company statement.
PayPal is a formidable competitor given its 346 million active users, and 26 million merchants globally, and its total payment volume of $US790 billion ($1 trillion) in 2019.
PayPal’s spending on marketing at $US2bn last year dwarfs that of the two Australian BNPL companies at $71m for Afterpay and $10m for Zip.
The American online payments company has a net margin per transaction of 1.3 per cent, compared with 2.3 and 2.45 per cent for Afterpay and Zip, respectively.
UBS said PayPal’s decision to offer BNPL-style instalment payments was possibly motivated by its desire to match alternative payment services and to expand point-of-sale financing options for its merchant customers.
The bank said PayPal’s Pay-in-4 model will only cost an extra 10 basis points of its total payment volume, which implies only minimal transaction volumes are needed for the new service to break even.
UBS has run two scenarios through its models to show the effects of PayPal’s market entry.
In one scenario, Afterpay and Zip meet PayPal halfway, and lower their margins by 90 basis points over five years.
In a second scenario, the Australian BNPL companies lower their margins by an aggressive 140 basis points over five years.
For Afterpay, the first and second scenarios lower its potential net profit after tax in FY 2025 by 55 per cent and 70 per cent, respectively.
The impact is less severe on Zip, as under the two scenarios its net profit after tax in 2025 is reduced by 20 per cent and 40 per cent, respectively.
UBS’s research could explain why it currently has a sell rating on both Afterpay and Zip, and has price targets for their shares that are much lower than their current traded prices.
For Afterpay, UBS has a price target of $28.25 per share, compared to its closing price Thursday of $75.63 a share.
In Zip’s case, UBS’s price target for the company is $5.50 per share, against $6.42 a share.
The Swiss bank has a brighter view on PayPal’s outlook, placing a neutral rating on the company and a price target of $US213 for its shares that closed Wednesday at $US194.60.