PayPal 'Pay in 4' takes direct shot at buy now, pay later rivals

Responding to rivals' success in the “buy now-pay later” (BNPL) segment, PayPal launched a short-term installment lending product called “Pay in 4” to expand its Pay Later product suite.

PayPal’s Pay in 4 solution allows customers to pay for purchases between $30 and $600 over a six-week period at zero interest and no fees in four installments, with automatic re-payments (late fees do apply if a customer misses a payment). Pay in 4 will be available to consumers on qualifying purchases in early Q4 2020.

The product is a departure from the main PayPal Credit BNPL installment product, which allows consumers to take out loans for a fixed period of time, typically for purchases over $99 for three- to 12-month periods. PayPal Credit is also often sold with promotional interest rates of 0% over six month periods. This expansion is a broad recognition of the growing popularity of BNPL solutions, particularly among Gen Z and millennial consumers as well as the expansion beyond traditional installment loans.

"In today's challenging retail and economic environment, merchants are looking for trusted ways to help drive average order values and conversion, without taking on additional costs,” said Doug Bland, SVP, Global Credit at PayPal, in a press release. “At the same time, consumers are looking for more flexible and responsible ways to pay, especially online. With Pay in 4, we're building on our history as the originator in the buy now, pay later space, coupled with PayPal's trust and ubiquity, to enable a responsible and flexible way for consumers to shop while providing merchants with a tool that helps drive sales, loyalty and customer choice."

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The Pay in 4 product is for consumers who want to fund a purchase that may be beyond their current ability to purchase, but don’t want to get into credit card debt or have a long-term financial commitment. Many consumers who use these deferred charge programs, such as the one offered by Australia's Afterpay, will have the future payments made from their debit card. Afterpay reported that 89% of its U.S. customers have their charges tied to a debit card.

Splitit, another BNPL provider, leverages an existing customer’s credit card to fund a purchase, charging installments on the customer’s card over a short period of time.

A version of PayPal's Pay in 4 solution is currently in market in France under the name “Paiement en 4,” where it was launched in July targeting small and medium sized businesses. The French product charges merchants 2.1% of the transaction and requires the business owner to pay 25% of the purchase up front with the remaining 75% charged in three monthly installments.

PayPal did not elaborate on the fees paid by the merchant other than stating that it is included in the merchant’s existing PayPal pricing. Pay in 4 allows the merchant to get paid upfront for customer purchases, less PayPal fees, without taking on any additional risk as they are born by PayPal.

PayPal standard pricing and PayPal Checkout for U.S. merchants is 2.7% of the transaction amount for in-store transactions and 2.9% plus a fixed fee for online transactions when receiving funds from a U.S.-based PayPal account. The fees are 4.4% of the transaction plus a fixed fee based on currency for online purchases, and 4.2% of the transaction for in-store purchases when the funds come from a non-U.S.-based PayPal account.

The challenge facing PayPal is that the deferred debit segment of the BNPL market is experiencing dramatic global growth. Despite PayPal experiencing its best quarter this year since its IPO, it’s under heavy competitive pressure from foreign rivals in the U.S. and overseas for the BNPL market. Earlier in August Afterpay expanded into Canada and acquired Pagantis to expand into France, Italy and Spain in a bid to take on industry stalwart Klarna.

It was only 2018 when Afterpay landed on U.S. shores. Originally designed to serve the e-commerce channel, Afterpay redesigned its app to cater to in-store transactions starting in July. Since its launch two years ago, Afterpay has built up an active customer base of 5.6 million consumers in the U.S. and launched in the U.K. in 2019 where it has built a base of 1 million active consumers.

Similarly, Sweden's Klarna, which also operates in the U.S., first began with offering traditional installment loans and has also added a four-payment, deferred charge solution to its product line in recognition of consumer demand. Klarna now offers U.S. consumers three distinct products that allow repayment in full in 30 days, four interest-free installments and loans over six to 36 months.