Nothing is free in life, and that holds for Buy Now Pay Later Lending. We discussed the marginal benefit of “interest-free lending” and the lack of clarity in claims of “no interchange (but merchant discount)”. And, of course, you’d be hard-pressed to find a BNPL that earns net income. Indeed, for many BNPL lenders, much of the revenue seems to come from late fees.
Regulators in the UK and Australia know this issue well and criticize the industry for non-bank-grade lending. Imagine if an insured financial institution turned in 12% loss rates?
PayPal announced a significant change that will likely affect the global industry. According to PayPal’s recently distributed Press Release:
- PayPal Holdings, Inc. (NASDAQ: PYPL) today announced it will no longer charge late fees for missed payments on buy now, pay later products globally.
- Starting October 1, new customer purchases with Pay in 4 in the United States, Pay in 3 in the United Kingdom, and Pay in 4X in France will no longer be subject to late fees – joining PayPal’s buy now, pay later solutions in Germany and Australia which do not charge late fees for missed payments.
- Eliminating late fees builds on PayPal’s commitment to deliver the most customer[1]centric, global installment solution portfolio that helps meet the needs of today’s consumers and merchants.
There is no question that BNPL made money on market capitalization, but when it comes to the bottom line, labeled “Net Operating Income,” it is a different world. There is a place in household budgets for BNPL loans. I’ve tested the market as a consumer, and the function works as promised—real-time decisioning, quick settlement, and low friction payments. But you have to wonder if the BNPL lender wished I had a low-FICO Score so I would default, rather than my proud, well-established score.
Paypal’s presence in the space is unique. With 377 million global customers, nearly one-out-of ten adults on the planet, they have a data repository of transactions, back -up funding sources, and a less than the urgent need to make profits on every line of business. But, as this article in The Atlantic noted a few years ago, Venmo did not generate a direct profit but rather provided PayPal with a way to get into the consumer wallet, with the expectation that PayPal will serve other needs.
Paypal’s announcement to not invoke late fees will create pressure for the BNPL industry. For PayPal, the action fills a broader goal. For loose-lending BNPL, expect an issue.
The strategy makes sense. My PayPal account, which is 20 years old, was set up to transact on e-Bay. But, after about ten years of passing money to my college-student kids with cash transfers, PayPal is a company I trust as much as I do my bank. And, every time I transact online and want to be sure there is someone between the merchant and me, I default to PayPal. If the merchant is not a PayPal acceptor, my business goes elsewhere.
PayPal’s move sets a business case for regulators to follow, who will surely use the model to question why a small loan, engineered to use weak credit criteria, relies on late fees as an essential part of the business model. Expect the 2023 business model for BNPL to be different than it is today. Perhaps an installment line of credit or a pathway to a banking account? Mastercard and Visa, both with solid installment options, provide global capabilities. Square has depth with merchants. BNPL is not a passing fancy, but the business model is in transition.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
