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PayPal has signed an exclusive multi-year deal that will hand over the rights to its European buy now, pay later (BNPL) loans to American investment firm KKR.
Under the agreement, KKR will purchase up to €40bn of current and future PayPal Pay Later loans originated in France, Germany, Italy, Spain and the UK.
KKR's private credit funds and accounts will acquire the loan portfolio, but PayPal will continue to handle all customer-facing BNPL activities in Europe, including underwriting and servicing.
Gabrielle Rabinovitch, senior vice president and acting chief financial officer at PayPal, said the main reason for outsourcing its BNPL receivables is to free up capital for other corporate uses.
"Our collaboration with KKR will allow us to accelerate our PayPal Pay Later originations alongside market demand in Europe, while preserving free cash flow for other strategic initiatives,” she said.
“This transaction is yet another example of our disciplined approach to capital allocation."
Subject to certain conditions, the transaction is expected to close in the second half of 2023.
Upon closing, PayPal expects to raise about $1.8bn in initial proceeds from KKR, which will be used to increase capital return to shareholders and for general corporate purposes.
PayPal also expects to allocate about $1bn to incremental share buybacks, contributing to $5bn in total share buybacks this year.
Since launching its first BNPL offering in 2020, PayPal has issued more than 200m loans to over 30m customers in eight markets through PayPal Pay Later products.
In 2022, PayPal processed more than $20bn in BNPL payments globally — an increase of about 160 percent above the previous year.
Reading between the BNPL lines
Despite this rapid growth, payments industry observers said the deal speaks to a lack of confidence from PayPal in the future of its BNPL business.
“It’s an admission that BNPL is only a small payment niche and will not take over the payment world, while funding rates from high interest rates are destroying any profits,” said Grant Halverson, CEO of Australian payments consultancy McLean Roche.
Speaking to VIXIO PaymentsCompliance, Halverson said the move by PayPal is designed to help it survive the “BNPL shakeout” that began in 2021.
“BNPL has always been a small niche in payments, dating back to 2020. All the hype, spin and PR hasn’t changed it either,” he said, noting that BNPL’s media coverage is vastly disproportionate to its real-world usage.
In the latest Reserve Bank of Australia (RBA) consumer payment survey, (which is yet to be published), BNPL transactions made up 0.7 percent of all payments, up from 0.5 percent in 2019, according to Halverson.
Going forward, Halverson said it is inevitable that once the BNPL shakeout is over, only a handful of players will be left standing and they will most likely be those with direct ties to major banks or Big Tech.
“It will be hard for any fintechs to compete with banks, Apple, Amex, etc,” he said. “High funding costs, bad debts and regulations will defeat fintechs.”
Paypal is likely to be considered among this “handful of players” given its size and the fact it has a banking licence in Luxembourg.
“The good old days of zero interest rates, media hype, no profits and no regulations seem like a long time ago now — even though it was only two years ago.”
However, another source who wished not to be named said that analysts who look at PayPal’s BNPL arm as a standalone business fail to appreciate that, for PayPal, BNPL is part of a wider proposition it offers its merchant customers.
“PayPal is competing with other providers to attract merchant customers,” he said. “It aims to offer a full range of services designed to offer a seamless and frictionless payment experience to help its customers convert sales."
“Part of its proposition, which includes BNPL and standard credit, is its ability to sell or connect its merchant customers with an active and targeted consumer base.”
Interest-free credit in a high-interest rate environment
Other payments industry professionals said that even for a relatively large firm such as PayPal, changes to the BNPL business are to be expected, given the changes in interest rates since 2022.
Gary Prince, CEO of The Payment Firm, a London-based e-money firm, said that even for a giant such as PayPal, it is “extremely challenging” to offer an interest-free product in a high-interest rate world.
“I have often said that BNPL seems to be the ultimate happy path product, as it is only viable with low interest rates,” he said.
“And if it were a regulated product, it is unlikely that it would have been launched at all, as the unhappy path scenarios would have to be catered for and the risk mitigated.”
Like Halverson, Prince said he expects to see the BNPL playing field thin out, leaving only a handful of major players.
“It is no coincidence that the large majority of companies who entered the BNPL market — with such fanfare and a lot of noise — are rapidly disappearing without a trace,” he said.
Similarly, the threat of regulation, which is imminent in markets such as the UK and Australia, will add to the headwinds that the sector is already facing.
“BNPL is being squeezed from all sides, with regulatory pressures, growth in bad debt and defaults as customers are unable to pay, and a sharp decline in uptake as consumers are reducing their spending,” he said.
Affordability checks, which are also set to feature in the UK’s forthcoming regulatory framework for BNPL, will add another layer of friction to the BNPL business model.
