Paypal Holdings Inc (NASDAQ: PYPL) yesterday announced its expansion into the buy now, pay later (BNPL) sector, sending investors scurrying in all directions. The payments giant entered the $5 trillion United States retail market with its new offering 'Pay in 4'. The service is an expansion on PayPal's existing pay later solutions, which include PayPal Credit's revolving credit line and Easy Payments.
Doug Bland, SVP of Global Credit at PayPal spruiked the company's offering saying "With Pay in 4, we're building on our history as the originator in the buy now, pay later space, coupled with PayPal's trust and ubiquity, to enable a responsible and flexible way for consumers to shop while providing merchants with a tool that helps drive sales, loyalty and customer choice."
The competitive difference here is that merchants will not have to pay any additional fees. The service will be included as part of PayPal's current pricing. In addition, it won't be promoting other merchants to its customers, unlike the other BNPL companies. Nonetheless, the question remains; will Paypal just scoop up the lion's share of the market, or are the ASX BNPL shares well placed to compete?
What happened to BNPL shares yesterday?
Yesterday marked one of the largest falls in the short history of the BNPL sector. The Sezzle Inc (ASX: SZL) share price fell the most, ending the day down by 14.7%. Furthermore, Zip Co Ltd (ASX: Z1P) fell by 12.77%, OpenPay Group Ltd (ASX: OPY) by 7.18%, Splitit Ltd (ASX: SPT) by 7.26%, and market leader Afterpay Ltd (ASX: APT) was down by 8.04%.
Yesterday's falls underline the bubble-like nature of the sector, and the almost gambling approach of many buy now, pay later investors. The rapid growth of Afterpay competitors also underlines just how low the barriers to entry in this sector are. What's more, there are no reasons for shoppers to favour any one of these services. At the end of the day, they are just payment instalment services. In addition, private companies like Limepay are already working to help organisations offer instalment services without the BNPL providers. Finally, it underscores the stratospheric and unsustainable market valuation of Afterpay.
Is PayPal really a threat?
In my opinion, PayPal is definitely a threat. It is the largest 'digital wallet' payment method for the United States and the United Kingdom. In fact, the company boasts an 82% better conversion rate than other forms of payment and it already has 237 million shoppers globally.
PayPal won't be the last shark in the waters. In fact, it isn't even the first. Commonwealth Bank of Australia (ASX: CBA) has already entered the BNPL market locally. In January, the bank announced it would be premiering its new partnership with Swedish private bank, Klarna. CommBank has a 5% stake in Klarna, and 50% ownership in the Australian and New Zealand business.
This is no idle threat, CommBank is far and away the nation's largest digital payments processor. However, for those who thought the bank would just sweep in and take most of the market; it hasn't happened. Moreover, the US market is gigantic. It remains to be seen whether PayPal can easily take out the majority of the US market.
The counter narrative
Personally, I favour the counter narrative. All of the big players have been caught flat footed by the rapid onset of the BNPL market and they are desperately trying to play catch up. Sure, PayPal is a threat. But this sector is already filled with threats. Moreover, PayPal has pre-existing pay later mechanisms which don't seem to have set the world on fire.
The strongest argument for me, is that most of the serious players already have deals with large digital payment points. For example, Afterpay has a deal with Apple Inc (NASDAQ: AAPL)'s Apple Pay and Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG)'s Google Pay. Zip Co is on Amazon.com Inc (NASDAQ: AMZN) and has a new deal for business lines of credit with eBay. Lastly, Splitit has deals with Visa and MasterCard, enabling its point of sale service with merchants globally.
Another competitive advantage that the BNPL shares have are their portals. Each of the ASX BNPL companies offers a digital shopping mall with dozens of online stores to explore. Not only are they helpful for customers, they actually drive business to merchants. The fee is for more than just processing payments and increasing over the counter sales.
Foolish takeaway
I believe the sell off in BNPL shares on Tuesday was preemptive. The ASX BNPL shares have positioned themselves well through partnerships, differentiated service offerings, and the digital ecosystem each one has built. Not only that, but the global market is very large, with companies like Sezzle already deeply embedded in the US.
In the final analysis, I think the market is large enough to support several BNPL companies. I also think several of the local companies are well placed to establish a defensible beach head. Yesterday's sell off has created several buying opportunities. In my view, both Sezzle and Zip Co are very interesting at their current prices.
