Internet payments powerhouse PayPal is rapidly expanding its already strong position in the growing online and mobile shopping marketplace. Building upon its acquisition in 2008 of BillMeLater, and now branded as PayPal Credit, the company now has extended over $3Billion in consumer credit. PayPal Credit targets buyer segments such as the underbanked, millennials, and immigrants that are not yet in the mainstream of bank credit card usage. Further leveraging PayPal Credit’s strategy is the upswing in mobile buying and the need for instant credit decisions.
Consumers trolling Shop.com may have noticed a marketing hook more often associated with big-box stores like Best Buy than an online retailer. Under the product description for a Dell Inspiron laptop there’s a PayPal Credit button: “Enjoy Easy Payments.”
The company is offering consumers a choice between buying the machine outright for a discount — or stretching the payments over nine months. The enticement looks to be effective. Since Shop.com introduced the option last July, average order sizes have increased from $123 to $140 and shoppers are buying more big-ticket electronics, said Eddie Alberty, vice president of strategic partnerships at the Greensboro, N.C., company.
Don’t expect PayPal’s expansion drive to be a clear sailing due to formidable competition from US startup Affirm and Sweden’s Klarma, as well as Amazon, whose UK unit is offering installment payments on big ticket items. Additionally, regulatory watchdogs are concerned about truth-in-lending and disclosure policies. Some online purchase interest rates are pegged at an eye-popping 30%.
Inevitably, there are concerns that by offering more credit online, PayPal and other upstarts will encourage low-income shoppers to get in over their heads. Depending on an applicant’s credit-worthiness, Affirm interest rates range as high as 30 percent; fixed-rate credit cards currently charge 13.1 percent on average, according to Bankrate.com. At the same time, the ease of getting credit — just push this button — could lead some consumers to skim over fine print explaining that missing a payment incurs a penalty. PayPal, for example, charges a late fee of $35 — which can turn an interest-free promotion into a costly transaction.
Merchants and payment providers are looking for a smooth and easy checkout; regulators want full disclosure of the rules. PayPal in May agreed to pay $25 million in refunds and fines to settle a complaint from the federal Consumer Financial Protection Bureau, which alleged it signed up online shoppers for credit without their permission and forced them to use PayPal Credit rather than their preferred payment method.
Overview by Raymond Pucci, Associate Director, Research Services at Mercator Advisory Group
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