PayPal entry changes the BNPL game: UBS
PayPal’s entry to the buy now, pay later sector is a significant turning point, says UBS analyst Tom Beadle.
PayPal’s entry to the buy now, pay later sector is a “significant turning point”, according to UBS analyst Tom Beadle.
Mr Beadle warns that the marginal cost of PayPal’s “Pay in 4” product might be just 10 basis points, while its merchant reach is about 500 times that of Afterpay and 900 times that of Zip Co.
“While the buy now, pay later sector has provided innovative payment and credit solutions with attractive economics, our two key concerns have been the risk of competition and regulation,” he says in a note to clients.
“With PayPal’s 346 million monthly active users, more than 26 million merchants globally, and $US790bn ($1.1bn) of total payment volume over the last 12 months, its entry into ‘Pay in 4’ in the US could be a significant turning point.”
Mr Beadle notes that Pay in 4 comes at no additional cost to its merchants and is free to customers who pay on time.
While PayPal charges merchants about 2.4 per cent on average, Afterpay charges 3.9 per cent, and Zip Co’s QuadPay might be slightly higher.
Mr Beadle sees two scenarios for Afterpay and Zip amid increasing competition: “meet halfway”, where Afterpay and Zip lower margins by about 90 basis points over five years to match competition, or “intense competition”, where margins are lowered by about 140bps over five years.
The scenarios would lower UBS’s forecast net profit for Afterpay in the 2025 financial year by 55 per cent and 70 per cent respectively, while its net profit forecast for Zip falls 20 per cent and 40 per cent respectively.
He said it highlighted the challenge Afterpay and Zip faced to win the long tail of smaller merchants as well as larger merchants not yet on their platforms, given PayPal’s offering is significantly cheaper and requires no additional integration.
He also notes the financial resources at PayPal’s disposal, given its marketing spend of $2.0bn in 2019.
Afterpay shares closed up 2.1 per cent on Thursday at $75.63, while Zip fell 2.9 per cent to $6.42.
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