A veteran of PayPal's "buy now, pay later" efforts says there's a simple reason it gave up its early lead as a pioneer of fast online credit: It wasn't focusing on merchants.
PayPal was an early leader in online payments and still dominates that market. But even though it bought BillMeLater, a company devoted to pay-later purchases, in 2008 when the market was still nascent, and turned it into its PayPal Credit division, "buy now, pay later" is a tiny part of the stream of commerce PayPal facilitates.
[For a deep dive into "buy now, pay later," see Protocol | Fintech's new Manual.]
Companies like Affirm, Afterpay and Klarna have cozied up to merchants so they can capture the attention of consumers both as they shop and as they're about to pay. By cutting out the traditional payment rails, they're a threat not just to credit card companies but to PayPal as well — a menace that's only going to grow as they copy features PayPal has long had, like accounts that can hold cash balances for spending.
In the second quarter, PayPal processed $311 billion in total payment volume. But only $1.5 billion of that was in "buy now, pay later." Affirm did $2.5 billion in gross merchandise value in the same period, and Klarna handled $20 billion.
There's a simple reason PayPal is playing catchup in this fast-growing niche, according to Greg Lisiewski, a veteran executive who joined PayPal through the Bill Me Later deal and is now vice president and general manager of its global pay-later business. The company focused on the consumer experience: on the theory that easing checkout was the most important way to boost conversions for retailers. It largely succeeded at that while building a massive merchant network.
But "buy now, pay later" providers offered something new to merchants: higher order values and increased conversions, often in exchange for a higher cut of the resulting purchase.
PayPal is now responding, leveraging its existing network of 32 million merchants and 403 million active accounts. Merchants that are already integrated with PayPal can flip on Pay Later without having to install new code or pay extra. About 40,000 merchants have put PayPal's pay-later messaging on product or other pages, and far more — 650,000 merchants — have made sales on PayPal's pay-later terms.
At the same time, PayPal is developing its consumer side. Its app remains far more popular than those from Affirm, Klarna and Afterpay, though PayPal's rivals are pushing them hard, and Afterpay is set to combine with Cash App after Square's $29 billion purchase of Afterpay goes through. A key aspect of its new super app, which combines sending money, paying and shopping, is its $4 billion purchase of Honey, a coupon-code tool, which now provides offers for the PayPal app's shopping hub.
Lisiewski is well versed in consumer credit. He points out that Bill Me Later had a "pay later" tagline long before the term was trendy. (The exact wording: "Buy fast. Feel secure. Pay later," Internet Archive captures show.) Now he's working to help PayPal reclaim its pioneering position. We caught up with him to talk about PayPal's strategy to counter the upstarts.
This interview has been edited for brevity and clarity.
How does "buy now, pay later" fit into PayPal's overall strategy?
We became part of the PayPal family in late 2008, and at that time the strategy was largely around taking this high-growth company and helping it continue to build out the consumer value proposition. The one area that we got a little bit away from was the merchant side. We focused less on merchandising through merchant product pages and the like, and more about making sure it was available in the wallet and driving customer reuse. We were a little slow to innovate products to go alongside Bill Me Later, which was rebranded as PayPal Credit.
So fast forward to a couple years ago: New entrants were entering the market that were basically following the Bill Me Later playbook of distributing financing products through merchants, and helping them drive sales. But we had spent the last 10 years really focused on optimizing the checkout experience. We have industry-leading conversion as a payment type.
It sort of created a white space for "buy now, pay later" value propositions to move upstream in the shopping journey, which is another way to help drive conversions. And to your question, that's how "buy now, pay later" fits into today's strategy. It's a value prop and a tool that we can use to let merchants leverage to help them drive incremental customers, incremental sales and conversion.
Is PayPal going after big-ticket or smaller items with "buy now, pay later"?
For today, what we sell to merchants is Pay in 4 to help with those lower average order value-type verticals, as well as to make sure we're serving millennial and Gen Z customers. And we continue to have PayPal Credit, which is a six-month offering, and in some cases we do longer-term offerings with merchants for bigger purchases. And you'll see us continue to invest in new products there as well. So our plan, certainly, over time is to serve all merchant segments, all price points and all consumer segments.
How does PayPal sell the value of "buy now, pay later" to merchants?
We're not charging merchants anything incremental on top of what they already pay to process PayPal. Because we're not a monoline "buy now, pay later" provider, ultimately most of our business ends up being as a payment processor. Payment processors are a scale business and we have scale. Therefore we don't have to make all of our money by charging a premium. For us, it's helping merchants sell more using our products and then that pulls more volume to our platform.
Does PayPal need to offer more types of services to merchants? That's a strategy Affirm and Klarna have been pursuing.
We aim to be a one-stop shop for merchants to serve all or certainly the majority of their needs. And we do that today in a large way between our branded business, our card-processing business, our insights business, our broad relationship with merchants and Pay Later. So we've always thought of ourselves as not a point-solution provider to merchants but a strategic partner, and for merchants of all sizes.
And it was not a surprise to see that monoline "buy now, pay later" providers who carved out a niche and have demonstrated value to merchants are looking at other ways to monetize that relationship by bringing additional services or features.
And in the case of the Square-Afterpay deal, I think you saw that, rather than Afterpay trying to build all the services that Square offered, Square decided to buy the one service they didn't have at scale. I think that deal itself was a moment of consolidation that will probably play out a few more times before the dust settles, as there are many large players, either in the space or circling the space.
Is price enough to compete on?
We also have the most established and trusted brand in the space. In the last Morning Consult survey, we had the second most trusted brand, period, let alone in payments or "buy now, pay later." If you're a smaller enterprise or one of our tens of millions of medium or smaller-size business partners that we're happy to democratize this service to, it's a real differentiator.
Then we have scale, which brings a couple of things. One is we have 375-plus million consumers on our platform. That also means we have lots and lots of data on their performance, and the ability to use that data to help us make an underwriting decision. In addition to which we have 10-plus years of experience, given our history with Bill Me Later and PayPal Credit.
"Buy now, pay later" companies are going direct to consumers with their own apps. Is that consumer side important to this market?
It is really important, and what the newer entrants have been able to do is develop at first relatively simplistic merchant store directories. But they made it easy for their customers to figure out where else they could use their product. PayPal has had various services like that for a while, so there's a general expectation that you can use PayPal just about anywhere. But it's important for us to also feed our merchant partners with customers and make it easy for our customers to find deals and offers, not just "buy now, pay later"-related, but whether it be $5 off of this or 10% off of that. And our super app launch, that will be pulling up a little more to the forefront the shopping features and benefits that our members can enjoy.
We made a big investment in this when we acquired Honey last year. And we continue to operate the Honey brand, but we're also now leveraging the tools and expertise there to make shopping benefits more discoverable and available to our consumers. And that supports the two-sided network.
How do consumers and merchants get PayPal's "buy now, pay later"?
We approach this from two sides. We have both a consumer side and merchant side. On the consumer side, we've enabled Pay Later and Pay in 4. If you're paying in the U.S., it's a wallet feature, whether or not a merchant has chosen to activate Pay Later for PayPal. So consumers know if PayPal's there, they'll have Pay Later even if they're not seeing it on the product page. Or even if they're seeing another pay-in-four provider.
So this works even for a merchant that hasn't turned on Pay in 4?
Yes, a merchant we don't work with from a Pay in 4 perspective. But they have to be a merchant that we work with in terms of a PayPal integration.
And for merchants it's the same?
They have the same experience with PayPal regardless of how it's funded. So they're paying the same PayPal take rate, they're getting funded on the same timeline. What happens inside the wallet sort of stays inside the wallet and that's one of the beauties of PayPal. We take the complexity of debit cards, credit cards, etc., out to the merchant flow and just manage it in the wallet, and we're integrated with PayPal on the front side and the back side.
What does the Paidy acquisition do for PayPal?
There's activities all over the globe in the "buy now, pay later" space. Specifically to Paidy, we just love the opportunity. Japan is a really big market for us. It's the third-largest ecommerce market in the world. And despite the size of the ecommerce market there, it's still largely cash-based, even the ecommerce. There's a lot of settlement that happens through convenience stores. And we love the Paidy products that bridge the two, with the digitization of cash. And on top of that, they have a "buy now, pay later" value proposition.
Note: This story was updated to reflect the most recent number of consumers on the platform.