PayPal (PYPL) – Buy Now, Pay Later (BNPL) – December 22, 2023
I shared a PYMNTS study last week showing PayPal’s top share position for BNPL in the United States. This follows a consistent trend of 3rd party data pointing to PayPal BNPL being the most or among the most popular in North America. This week, given the light news cycle, I wanted to dig into what this success could mean for PayPal and why we, as investors, should care.
The first item is obvious. BNPL is very popular among younger generations. PayPal needs to do a better job of attracting younger consumers, and it has a clear edge within BNPL to make this product its top of the funnel generator. It’s important to keep in mind that BNPL is merely one tool in PayPal’s product suite. BNPL is not its entire business like for an Affirm or Klarna, but a small, small piece of its business. It has extensive customer data profiles entailing far more product touch points than with point solutions. It offers its consumers more, has existed for longer and so it knows its customers better than the rest. It has data on loan repayment, savings, broad credit chargeback history and more. Simply put, within BNPL, it has the largest and most relevant dataset. That matters a lot. Why?
It means its approval rate on BNPL transactions sits at roughly 90%. Depending on which data source we go with, for the industry as a whole, that approval rate sits around 70%-85%. More approvals mean happier customers and a more successful BNPL offering. Thanks to its extensive customer data profiles, PayPal combines this tangible advantage with best-in-class loss rates. Relatedly, delinquency rates for this specific credit bucket remain in great shape for the firm as well. This means the happier customers coincide with financially healthier merchants. These merchants (and PayPal) enjoy a 30% higher order frequency from BNPL users with 90% of the volume being additive, not cannibalistic to demand. This is because BNPL is used mainly for shorter-term and smaller purchases.
BNPL could provide a real source of separation from the pack in a checkout world that has been largely commoditized to date. PayPal’s brand does offer a material boost in the field, but this is surely a welcomed second factor. There’s one more demand boost that BNPL provides for PayPal. “Upstream Presentment” means showing PayPal checkout and BNPL options before the actual checkout page. When PayPal secures these placements, its checkout share meaningfully rises. The instances of winning these types of placements have predominately come from its BNPL segment.
Ok got it… so this is good for PayPal volumes and revenue, but what about margins? BNPL is also good news for margins. About 90% of BNPL repayment is done via debit sources. Debit-funded means higher transaction margin for PayPal vs. credit-funded. This is because it pays out less in 3rd party interchange fees to other financial service companies involved in the transaction. With transaction margin a key concern for the PayPal bull case today, this should provide some needed alleviation. Fattening up Braintree’s margins is sorely needed too, but we’ll take all of the margin tailwinds we can get here.