PayPal's buy now, pay later launch is kicking off the next wave of adoption. Here's what it means for startups and banks competing in the space.

  • Buy now, pay later is booming as consumers increasingly shop online and are looking for ways to stretch their dollar.
  • PayPal is the latest player to throw its hat into the ring, launching interest-free installments available to all US merchants that offer PayPal as a way to pay.
  • With a check-out button on over 80% of the top 100 retailers in the US, PayPal's scale could help it compete with buzzy startups like Affirm, Afterpay, and Klarna.
  • Whereas players like Affirm, Afterpay, and Klarna charge merchants fees for each transaction, PayPal's installment product comes at no additional cost to the merchant.
  • However, the payments giant might face some headwinds with the rollout as other buy now, pay later players exclusive partnerships with merchants already in place. 
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Buy now, pay later is taking off amid the coronavirus pandemic, with e-commerce becoming more prevalent and consumers looking for ways to stretch their dollars.

And while startups like Affirm, Afterpay, and Klarna created plenty of buzz in the space, incumbents are stepping in, kicking off the next wave of point-of-sale financing. Earlier this year, Goldman Sachs partnered with JetBlue, offering buy now, pay later via its Marcus platform. And Amex has continued to expand its no-interest installment product, Pay It Plan It, to more cards. 

Most recently, PayPal announced it will offer a six-week interest-free installment product to all US merchants that offer PayPal as a way to pay at checkout. 

"The Pay in 4 installment product specifically is an interest-free buy now, pay later way for consumers to pay, and it will drive higher conversions without retailers taking additional risk or cost," Doug Bland, SVP of global credit at PayPal, told Business Insider. 

"The backdrop of all of this is, given the challenging and uncertain times that we're living in, we felt it was more important than ever to provide this solution, which will help both retailers and consumers alike," Bland said.

Read more: Here's how PayPal is looking to boost its credit business by leaning into a buy now, pay later frenzy

PayPal's platform is used by 83% of the top 100 retailers in the US, according to Forrester. And analysts expect that scale to be beneficial for PayPal in the competitive buy now, pay later space.

"That kind of scale and penetration to us means not only is it easier for PayPal to compete with incumbents in the buy now, pay later space by putting the product in front of their user base," Paul Golding, payments and lifestyle analyst at Macquarie Capital, told Business Insider.

"It also means that as a product it's likely more easily integrated with online marketplaces because the PayPal button and PayPal system is already integrated," Golding said.

PayPal is launching during the second wave of buy now, pay later adoption

Fintechs like Affirm, Afterpay, and Klarna have been marketed as an alternative to credit cards or other traditional ways to pay online, like PayPal. That first wave of buy now, pay later adoption has since been followed by a second wave of industry incumbents like Amex and Chase offering their customers the ability to pay in installments as opposed to the monthly credit-card cycle.

Incumbents' buy now, pay later-type products differ from the fintechs in that they are typically offered after the purchase, and the installment plans are then worked into credit-card statements.

"Phase two has been institutions like banks, issuers, and acquirers offering point-of-sale-like financing products after the purchase has been made and appears on the statement," Golding said. "That product is more of the incumbent wave."

Doug Bland, SVP and GM of Global Credit at PayPalPayPal

But PayPal, already known as a buy button at checkout, will offer its buy now, pay later product in the same context as the likes of Affirm and Afterpay. 

Read more: From Affirm to Klarna, buy now pay later startups are booming. But experts warn juggling explosive growth with responsible lending is a tricky balance.

"We do think that this could take [market] share from using conventional credit or debit cards, keying in the number and credentials," Golding said. 

"It used to be that going with another buy now, pay later was an alternative to using conventional PayPal, linked to some other card or account. Now it's all within the ecosystem, so the leap to make the installment financing choice is much shorter in our view," he added.

PayPal may be slowed by other players' exclusive retail partnerships, but PayPal's product comes at no additional cost to retailers

PayPal's path to success isn't entirely clear, though, as it may face challenges with merchants who have already entered into exclusive agreements with other buy now, pay later players.

"The difficulty with assessing whether there will be increased use or not is that in some cases, retailers have decided to engage other buy now, pay later platforms in exclusive agreements," Golding said. "That may or may not prove to be a barrier to PayPal broadly deploying this across the entire online marketplace ecosystem. That has yet to be seen."

It's unclear what share of other buy now, pay later players' retail agreements are exclusive. That said, unlike the leading startups, PayPal's installment product comes at no additional cost to its partner merchants, whereas players like Affirm, Afterpay, and Klarna charge merchants fees ranging from 3% to 6% of the transaction value.

"We can't comment on what other BNPL providers are doing, but Pay in 4 will be available in-wallet for most US merchants, and more than 80% of US retailers work with PayPal. And implementing the dynamic, upstream Pay in 4 messaging on product pages comes at no additional cost or risk to the retailer," Bland said.

The third wave of buy now, pay later could bring incumbents and fintechs head-to-head

To be sure, card companies are increasingly looking to enter the point of sale context. And the third wave of buy now pay later, Golding said, will likely involve issuing banks as well as the card networks. 

"I think there's likely going to be a third wave, which will include acquirers and card network rails developing waterfall functionality that will aggregate bids from a variety of services to provide the consumer with a point of sale lending offer," Golding said.

Waterfall functionality means that a card network like Mastercard, for example, could aggregate installment offers from its various bank partners and offer consumers a buy now, pay later product at the point of sale.

Mastercard's Vyze platform, which it acquired in 2019, gives merchants the ability to offer buy now, pay later options from multiple lenders. And the platform is growing. In August, Vyze added buy now, pay later startup QuadPay and digital bank Ally as lending partners.

Read more

PayPal's CFO outlines ambitious plans to become your virtual wallet and why potential partnerships with the likes of Amazon and Alibaba make more sense now

Buy now, pay later startups are 'having a moment' — here's why retailers like Walmart and Target are betting on installment payments to keep consumers spending

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