PayPal’s evolving strategy in a crowded BNPL market 

Buy Now, Pay Later (BNPL) gained ground in recent years as an alternative form of credit for online retail purchases. As more and more big players continue to enter the BNPL industry, competition in the space is intensifying.

PayPal entered the sector by launching its first BNPL offering – ‘Pay in 4’ – in 2020, and expanded its suite of products by rolling out another BNPL product, ‘Pay Monthly’, in 2022.

PayPal users can choose an installment plan that suits them after the eligibility screening. ‘Pay Monthly’ consumers can divide the total purchase cost into monthly payments over a period of 6, 12, or 24 months, unlike the ‘Pay in 4’ model, where users have to settle payments for purchases over a six-week span.

Additionally, the ‘Pay in 4’ program lets customers pay for purchases between $30 and $1,500, while the new program, ‘Pay Monthly’, allows consumers to make purchases between $199 and $10,000, with the first payment due one month after the purchase is made. Customers can then make monthly payments until the purchase price and interest are paid in full.

The decision to branch out its BNPL offering came as studies were showing consumers’ rising interest in manageable and flexible ways of making payments when paying for larger purchases. 65% of Americans were saving up for a bigger purchase and 79% were considering creating and maintaining a budget, according to the research.

Despite competition from the likes of Klarna, Affirm, Afterpay, and Apple, PayPal has built a sizable footprint in the BNPL space in a relatively short time. The firm has managed this by providing flexible payment options to its existing wide customer base of brick-and-mortar stores and merchants that already use PayPal for transactions on their websites and apps.

However, amidst the continuing popularity of BNPL loans, late fees are becoming more common. Nearly 11% of users were charged at least one late fee in 2021, up from 8% in 2020, according to a Consumer Financial Protection Bureau report.

Additionally, a new survey also shows that missed payments are on the rise at BNPL firms, with nearly 42% of BNPL consumers having made a late payment on their loan.

I spoke with Steve Mikulcik, VP of Global BNPL at PayPal, about the ramifications of such a fast-growing industry, and whether it is still serving the purpose of facilitating consumers given the current circumstances of mounting debt and soaring losses.

What are the ramifications of such a fast-growing industry that is becoming saturated?

S. Mikulcik: Certainly, there are a lot of players and I think it’s good and it’s bad. The players demonstrate that there is a lot of demand and a lot of opportunity to offer this product. If you believe some of the WorldPay reports, BNPL, as a share of e-commerce is expected to double between now and 2024 – so obviously, there are competitors who want a piece of that pie.

But I think with regulation, and pressure on the macroeconomic environment due to inflation and some of the funding of startups becoming less available, there will be consolidation in the industry – and there will be fewer players left standing at the end of the day.

PayPal actually welcomes the regulation as we’ve already taken steps that we feel will make our product resilient to any regulation — no consumer fees, no merchant fees, and we’re very upfront.

So to answer your question, I feel like all the players are actually helping drive the demand and buzz, to which consumers are really becoming accustomed. In the long run, I do think there will be some consolidation and I feel like PayPal will be well-positioned when that happens.

Given the current circumstances of bad debts and soaring losses, do you think BNPL is still serving its purpose of facilitating customers?

S. Mikulcik: I think it's a little bit of a misconception that BNPL is only for people who don't qualify for traditional credit products. 

We actually see a pretty broad adoption across our portfolio, amongst a wide range of demographics and industries – it isn't this niche product. It's really not just Millennials and Gen Z using it for fashion and apparel. We're seeing a lot of adoption from our core existing customers for home improvements, or general merchandise stores. 

There are some consumers who are opposed to revolving open-ended credit lines, and they sometimes don't trust that they'll be able to spend an appropriate amount. So I feel like it is serving its purpose of just adding payment flexibility with a very clear payment schedule and end date, with no chance to receive a late fee. 

Many people are realizing that it is actually free, and transparent and they can spread their payments over time with no catch, so to speak, definitely with PayPal. I explain it to people who ask how you make money since there's no interest and no fees. We're actually doing it to deepen the engagement with our customers while making the money off of our payment processing – just as we make with other funding instruments. 

It's really about using the product to enable e-commerce between the merchant and the consumer, which we have on both sides of that network. 

Do you think VC funding will continue to flow in the BNPL sector, or is it drying up?

S. Mikulcik: I don’t have any direct data to point to the fact that it did or could be drying up. But when you look at the valuations of some of the competitors, to me, it would be certainly less attractive from a VC standpoint.

In addition to the upcoming regulation, and the added cost of funds amid the macro environment, I can see how it would be less attractive for companies that don’t have the scale, distribution, and platform that we have. It’s pretty difficult to start this product from scratch and go one by one and integrate merchant by merchant.

It’s no surprise we were actually several years late to the party, but it was nice because we were able to turn it on in our wallet. And our consumers have now used this product at over 2 million merchants — because we have that wallet and the ubiquity of the wallet.

We also have the ability for consumers to pay with their bank account other than a credit card or a debit card. Competitors or new players that don’t have that wallet and that distribution will certainly face an uphill battle and a bit of an unknown regulatory environment.

How does PayPal differentiate itself from other players and their offerings in the BNPL space?

S. Mikulcik: I feel like we’re in a unique position because of our scale and how many consumers use PayPal every day to shop. We have the benefit of when consumers are shopping and using our wallet, we present the pay later options to them, so we’re constantly staying relevant.

For example, we launched our ‘Pay in 4’ product in the fourth quarter of 2020. Then we further responded to our consumer and merchant demands and launched our ‘Pay Monthly’ product. So we’re constantly listening to our merchants and our consumers and using that as a feedback loop, while certainly keeping an eye on the competition.

But more importantly, we’re listening to what our merchants are telling us and what our consumers are saying they want us to provide. We have an opportunity to interact with them every time they check out — through a little button that says ‘learn more about buy now pay later’.

Depending on the amount that they have in their cart, it offers a Pay Monthly offer or the Pay in 4, which is usually for lower transaction amounts between $30 and $1,500. The Pay Monthly, which is a monthly installment product, is from $199 up to $10,000 with terms as long as 24 months.

We’re constantly evolving — whether it’s for a $30 purchase or a $5,000 purchase, we want customers to make that purchase with PayPal with the most transparent options available.

What is the next frontier for PayPal in the BNPL sector?

S. Mikulcik: I think it's shoring up the foundation — making sure that it's a sustainable business model, which I feel that we have, working with the regulators and with the bureau reporting agencies. 

We're happy to participate and work with each credit bureau to make sure customers are getting credit for repaying on time. I don't actually think that regulation is going to be a bad thing. The bureaus are going to change their algorithm to incorporate these buy now pay later transactions. I know all three of the main bureaus are actively thinking about how to do that. 

I do see a world where there is more regulation, and potentially bureau reporting, and maybe a little more friction. As with things like that, it takes a little more friction, but I feel like with our platform and our technology, we're able to minimize that friction for consumers, and use all of the honest data and the history that we have with that consumer to make regulators feel comfortable that we're lending to people who can afford to pay loans back. 

The proof is kind of always in the pudding. I measure our ability to lend responsibly by our loss rates. I think we have the best loss rates in the industry. A lot of our competitors commingle their loss rates with some of their normal payment processing data, so it's hard to definitively say that when some of the companies are private – but again I feel strongly that the proof is in the pudding. 

I'm very comfortable with our loss rates that are going down despite the macroeconomic pressure. And that's because we've only been using the BNPL product for about two years, and we get better every single quarter with the honest performance that we're seeing.