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PayPal Plunges Into Red-Hot ‘Pay Later’ Race

PayPal is growing its suite of Pay Later solutions as the “buy now, pay later” trend continues to take hold in the U.S.

The company’s “Pay in 4” feature, expected to launch in time for the 2020 holiday season, is designed to help retailers drive conversion, revenue and customer loyalty without taking on additional risk or paying any additional fees, while enabling consumers to make a purchase and pay over four, interest-free installments.

Payments made on the platform can be between $30 and $600 over a six-week period. Pay in 4 will also appear in the customer’s PayPal wallet, so they can manage their payments in the PayPal app.

Along with Pay in 4, PayPal already offers several other financing options, including PayPal Credit, a reusable line of credit with various promotional offers built in, as well as Easy Payments, an installment payments service already available in the U.S. and U.K.

An Ascent survey conducted on July 7 indicates that 48 percent of U.S. shoppers have used PayPal Credit, formerly known as Bill Me Later. But PayPal Credit carries interest rates of 23.99 percent, with up to $39 per payment in late fees. The Pay in 4 feature would eliminate these barriers, and its inception was almost certainly driven by direct competitors’ lighter late fees and zero percent interest rates.

Nevertheless, PayPal Credit seemed to be a hit for many companies using it, suggesting that the same will come to Pay in 4. Businesses that promoted PayPal Credit on their site saw a 21 percent increase in sales versus those who did not, the payments giant said. Merchants with pay-over-time messaging on their site saw a 56 percent increase in overall PayPal average order values. Merchants using the platform can now also add dynamic messaging to deliver relevant, in-context pay later options early in the shopping journey, from the homepage, to product pages, to checkout.

The company’s roots are based in providing consumers with alternate payments, so the expansion of its “buy now, pay later” offerings isn’t a surprise. The company also owns Venmo, which is popular among millennials and Gen Z shoppers for its simple transition of funds from one user to another.

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PayPal will still make credit-risk decisions and sometimes do soft credit checks, which won’t affect customers’ credit score, as part of its risk assessment, but Doug Bland, senior vice president of global credit at PayPal, said the company will also lean on its “advanced analytics” in determining whether or not to allow access to the Pay in 4 option for a given transaction.

PayPal also offers PayPal Ratenzahlung and Paiement en 4X—installment products in the German and French markets and Pay After Delivery, a buy now, pay later offering in Australia, Canada, France, Germany, Spain, the Netherlands and the U.K.

QuadPay, Afterpay seek new avenues of growth

It should be known that while the space is growing, it is still yet to be seen how the industry will shake out given there are a lot of nascent players in different markets and some collaborating with larger payments names.

For example, QuadPay, which recently was acquired by Australia’s Zip Co, is partnering with Mastercard’s alternative financing platform Vyze to provide the company’s businesses and customers with an installment-based payment shopping experience across all channels.

Vyze will offer the “buy now, pay later” payment method to merchants, while providing QuadPay distribution across the Vyze merchant network through a single integration. The platform will enable consumers to pay in four installments and will include no interest rates.

QuadPay says its merchants typically see an average order value lift of 20 to 60 percent and conversion rate improvements of up to 20 percent “almost immediately after launch.”

And within the span of one week, Afterpay acquired two different installment payments companies—Spain’s Pagantis for 50 million euros ($59.7 million) and Indonesia’s Empatkali for an undisclosed amount—as it attempts to further crack the European and Southeast Asian markets. The Accent survey indicated that Afterpay is already the second-biggest “buy now, pay later” company in the U.S., with 35.6 percent of customers having used the platform.

Klarna incurs major losses amid rapid expansion

Sweden’s Klarna, the fourth most-used installment payments platform in the U.S. and worth an estimated $5.5 billion, remains the market leader in Europe. But the firm is paying a big price for its rapid growth, racking up a net loss of 522 million Swedish krona ($59.8 million) between January and June, a sevenfold increase from the net loss of 73 million krona ($8.4 million) it posted in the same period last year.

Total operating income, which doesn’t count the company’s operating expenses or credit losses, came in at 4.6 billion krona ($526.7 million), which represented a rise of 37 percent from 3.3 billion ($381.7 million) krona in the first half of 2019. The company said its gross merchandise volume—was 215 billion krona ($24.9 billion) in the January-June period, up 44 percent year-over-year. Total operating expenses before credit losses rose by 45 percent to 4 billion krona ($458.4 million), up from 2.7 billion krona ($309.4 million) a year earlier.

It’s worth noting that the company’s credit losses increased by 93 percent to nearly 1.2 billion krona ($137.5 million). This could be problematic for Klarna particularly because these losses are incurred when a customer doesn’t pay back a loan, but late fees as a share of volume have dropped to 17 percent.

The company has been expanding aggressively, particularly in the U.S. where it claims to have added another 1 million customers in the last three months, with monthly active users in the market expanding 4 times from June 2019 to June 2020. Klarna says that new customers affect its net credit losses.

Earlier in the summer, the company launched its first loyalty program called Vibe within its platform.

In total, the installment payments market is set to grow at a combined annual rate of 28 percent over the next five years, according to a February report from Worldpay FIS. The Accent report highlights that shoppers are using installment payments platforms for two major reasons: to avoid paying credit card interest (39.4 percent of shoppers) and to make purchases that otherwise wouldn’t fit in their budget (38.4 percent).