PayPal recently announced that it is scrapping late fees on its Pay In 3 service.  The change will take effect from 1st October.  By contrast, PayPal is raising the fees it charges to UK merchants taking payments from EU customers.  These two actions may be connected and could be a sign of what’s to come in the buy-now-pay-later (BNPL) sector.

The basics of BNPL

The flourishing BNPL sector is essentially a direct competitor to the established credit-card sector.  Both sectors charge merchants transaction fees in return for taking on the risk of providing credit to customers.

These transaction fees are generally charged as a percentage of the sales price.  They may or may not be capped.  Even if they are, both sectors can be very lucrative for the providers involved.  The incentive for the merchant is the opportunity to increase sales of big-ticket, high-profit-margin items without the risk of providing credit directly.

With both BNPL and credit cards, the customer has the option to pay back the amount borrowed by a certain date and pay nothing for the use of the credit.  With BNPL, the customer typically has to make predefined instalments.  With credit cards, they need to make minimum payments.

If customers do not make the agreed payments, BNPL providers may add penalty fees to the amount owed.  Credit card providers may also do this but, on a like-for-like basis, minimum payments on a credit card are often lower than the instalments on BPL purchases.  This means that customers can spread the cost over a longer period, albeit paying highly for the privilege.

The BNPL market  in the UK

In the UK, the major names in the BNPL sector include Klarna, Clearpay, Laybuy, Splitit, Stripe and, of course, PayPal.  Fintech Revolut and digital bank Monzo are also due to launch BNPL services.

This list may not look very long but it’s important to remember that BNPL services work through merchants, not customers.  This means that their user base is much smaller.  What’s more, there are plenty of potential new entrants to the UK’s BNPL market.  The credit-card acquirers could easily pivot to BNPL and international BNPL services could start to target the UK.

In short, therefore, the established BNPL providers are in a race against time.  They need to gain territory they can defend against each other as well as new entrants.  Realistically, the run-up to Christmas 2021 is likely to be a key battleground for them.

Fighting for BNPL market share

One of the quirks of the BNPL sector is that it can be a lot easier for them to sign up merchants than for them to sign up end customers.  Quite bluntly, from a merchant’s perspective, there is often nothing for them to lose by signing up for a BNPL service.  They are simply offering their customers another way to pay and hence increasing their chances of making a sale.

Most customers, however, will probably already have at least one credit card with them when they shop.  They would therefore need a compelling reason to sign up for an account with a BNPL provider instead.  Once you have a customer past that hurdle, however, making future sales could become much easier.

This is where PayPal has a huge advantage over the other BNPL services, including Klarna.  PayPal already has a huge (and global) base of end customers to whom it can market its BNPL offering.  It just needs to give them a reason to choose it over alternatives.  Scrapping late fees could look very attractive to consumers facing Christmas after the pain of COVID19.

In a double-win, it could help to keep PayPal on the right side of the regulators too.  The BNPL sector is currently largely unregulated.  The government has, however, made it clear that regulation is on the cards.  What’s more, the change won’t necessarily impact PayPal’s bottom line because it will be charging increased fees to merchants.

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