PayPal finds opportunity between banks and buy now/pay later lenders

When is a buy now/pay later loan just … a loan?

PayPal's newest offering, which allows consumers to repay over 24 months, oversteps the common pay-in-four model for borrowers who want to make bigger purchases. It also could be a key ingredient in the company's super app, which is being designed to combine its core payment services with other financial products.

"There is no 'one size fits all' when it comes to making purchases, and the same is true for the buy now/pay later industry," said Greg Lisiewski, PayPal's vice president of shopping and Pay Later. 

The new product, called Pay Monthly, is meant to be a complementary offering that makes PayPal more of a one-stop shop.  "All PayPal Pay Later plans can be easily managed and paid within the PayPal app," Lisiewski said.

As PayPal adds more financial products, its app increasingly resembles a banking app. PayPal also offers high-yield savings accounts and shopping tools in addition to its core checkout and peer-to-peer payments products. PayPal and Venmo also support buying, selling and investing in cryptocurrency. Other PayPal services allow users to transact with debit cards, pay bills, receive payroll disbursements, cash checks and make investments. 

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PayPal has expressed ambitions to build a mobile app that will support most of the functions of a traditional bank. Other large technology firms such as Apple, Amazon and Meta are also pursuing this strategy, using a massive enrolled base of payment customers to offer a stack of financial and non-financial services through the same app. 

This approach can make PayPal more useful to consumers during a challenging economic time, according to Lisiewski. 

"As the macroeconomic environment continues to evolve, consumers are looking for ways to stretch their finances and have greater control over their purchases," Lisiewski said. 

PayPal's Pay Monthly joins a consumer credit menu at PayPal that already includes its Pay in 4 BNPL product introduced in 2020; and other PayPal lending products such as PayPal Credit, which splits purchases over $99 into six monthly payments, with no interest if the loan is paid on time. Pay in 4 charges no fees or interest for four biweekly payments for purchases between $30 and $600. 

Pay Monthly's terms depend on the loan, but the loans will typically be between $199 and $10,000, with an APR between 0 and 29.99%. Consumers who qualify are given three options with different terms.

PayPal’s monthly payment option gives BNPL a creative spin, according to Brian Riley, director of Mercator Advisory Group's credit advisory service. By offering a set of monthly options that extend from 6 to 24 months, it broadly expands the addressable market, Riley said. 

"Few consumers could shoulder a pay-in-four commitment for $5,000, but when you extend the term to 24 months, can keep the payment below a manageable $300," Riley said. "And merchants can be more confident [because] the provider is PayPal, not a struggling fintech."

PayPal Monthly is offered in partnership with WebBank, a Utah-based industrial bank. PayPal has offered loans in partnership with other banks since 2004.

The differences in consumer preferences and demand for different types of purchases necessitates a diverse range of BNPL options, Lisiewski said. 

"Having a full portfolio of buy now/pay later plans allows consumers more choice to select the option that best suits their preferences and budgeting," Lisiewski said.

PayPal's BNPL products put it in competition with fintechs such as Affirm and Klarna, banks that are offering their own BNPL  loans, tech firms such as Splitit and equipifi that provide technology that banks can use to offer BNPL, and Apple — another large technology company that has recently begun offering BNPL. Block (formerly Square) had greatly expanded its ability to offer BNPL through its acquisition of AfterPay. 

If more nonbanks offer longer terms for BNPL loans, it changes the dynamic of their competition against banks, said Jordan McKee, principal analyst for digital payments at S&P Market Intelligence.

"The trend toward long-term financing provides financial institutions with an intriguing entry point into BNPL," McKee said. Sezzle, for example, has partnered with lenders such as Ally and Bread to offer long-term financing alongside a traditional pay-in-four offering, McKee said. 

"Some institutions may partner directly with BNPL providers, while others could build white label BNPL platforms for retailers to offer long-term financing under their own brands, as Barclays does today," McKee said. 

Like other BNPL providers, PayPal positions the loans as different from traditional bank credit acquired through a credit card.  The payment company refers to Pay Monthly as a "single-purchase" credit product that does not contribute to a broader debt relationship. 

"Each time a shopper wants to use Pay Monthly, they must apply for a new loan. It is not a revolving credit line that can be used for multiple purchases at different times," Lisiewski  said. 

BNPL grew quickly during the early part of the pandemic as consumers rushed to the alternative financing option. But more recently, the fintechs that offer BNPL have hit a rough patch, with the Consumer Financial Protection Bureau pressuring the fintechs to assess the impact of their lending practices on rising consumer debt. These fintechs have also suffered from falling valuations and concerns over rising defaults. BNPL loans are also increasingly being added to credit reports, potentially giving banks and regulators a greater window into the opportunities and risks in the market. 

PayPal does not report Pay in 4 lending to the credit bureaus, but it does report Pay Monthly lending, the company said.  PayPal Pay Later products utilize a variety of data when making decisions on applications, including proprietary data, said Lisiewski, adding 90% of first-time users of pay later offerings are existing PayPal customers. 

"We know who the applicants are and have experience with them," Lisiewski said.