PayPal disrupts the BNPL model by causing late fees


Nothing is free in life, and that goes for Buy Now Pay Later loans. We discussed the marginal benefit of “interest-free loans” and the lack of clarity in “no exchange (but merchant discount)” claims. And, of course, you would be hard pressed to find a BNPL that generates net income. Indeed, for many BNPL lenders, a large portion of the income appears to come from late fees.

UK and Australian regulators are well aware of this problem and criticize the industry for non-bank lending. Imagine if an insured financial institution posted loss rates of 12%?

PayPal has announced a significant change that will likely affect the global industry. According to the press release recently released by PayPal:

  • PayPal Holdings, Inc. (NASDAQ: PYPL) announced today that it will no longer charge late fees for missed payments when purchasing immediately and subsequently paying for products around the world.
  • As of October 1, new customer purchases with Pay in 4 in the US, Pay in 3 in the UK and Pay in 4X in France will no longer be subject to late fees – join PayPal solutions buy now, pay later in Germany and Australia which does not charge late fees for missed payments.
  • Eliminating late fees builds on PayPal’s commitment to deliver the most customers[1]portfolio of comprehensive, installment-centric solutions that help meet the needs of today’s consumers and merchants.

There is no doubt that BNPL made money on market cap, but as far as the bottom line, labeled “net operating income”, it’s a different world. There is a place in household budgets for BNPL direct lender loans. I have tested the market as a consumer and the feature works as promised: real-time decision making, fast settlement, and low friction payments. But you must be wondering if the BNPL lender wanted me to have a low FICO score to default, rather than my proud and well-established score.

The presence of Paypal in the space is unique. With 377 million customers worldwide, nearly one in ten adults on the planet, they have a repository of transaction data, sources of back-up funding, and a less urgent need to make a profit in each sector of activity. But, as this article from The Atlantic noted a few years ago, Venmo did not generate a direct profit but rather provided a means for PayPal to enter the consumer’s wallet, in the hope that PayPal meets other needs.

Paypal’s announcement not to claim late fees will put pressure on the BNPL industry. For PayPal, the action serves a broader purpose. For loose BNPL loans, expect a problem.

Strategy makes sense. My PayPal account, which is 20 years old, has been configured to transact on e-Bay. But, after a decade or so of passing money to my college kids with money transfers, PayPal is a business I trust as much as my bank. And, whenever I do an online transaction and want to make sure there is someone between the merchant and me, I default to PayPal. If the merchant doesn’t accept PayPal, my business goes elsewhere.

PayPal’s move establishes a business case for regulators to follow, who will surely use the model to ask why a small loan, designed to use weak credit criteria, relies on late fees as a critical part of the business model. Expect BNPL’s 2023 business model to be different from what it is today. Maybe an installment line of credit or a route to a bank account? Mastercard and Visa, both with strong payout options, offer global capabilities. Square has depth with merchants. BNPL is no passing fancy, but the business model is in transition.

Insight provided by Brian Riley, Director, Credit Advisory Services at Mercator Advisory Group

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