PayPal: Give Us Some Credit

Author

Owen Thomas

July 31, 2014

Lend PayPal your ears: The eBay-owned payments company doesn’t want to just process your transactions. It wants to fund them, too.

The most visible move it’s making is changing the name of BillMeLater, a provider of consumer credit eBay bought in 2008 for a little under $1 billion, to PayPal Credit.

That minor branding fix is just the tip of a financial iceberg. PayPal is also rapidly expanding PayPal Working Capital, a financing program for small businesses. It is taking PayPal Credit international. And it plans to make PayPal Credit an option for the growing number of mobile-app transactions that its Braintree subsidiary processes.

Credit Matters

The interchange fees charged by banks for credit- and debit-card transactions have long been an annoyance for technolibertarians. (It’s not clear if their objections boil down to anything aside from a preference that they, not fusty banks, get to be the money-making middlemen in all transactions.)

That’s one of the attractions of Bitcoin. The launch of the digital currency-cum-transaction-engine promised a financial fantasy: instantaneous, irreversible digital transactions, bypassing banks and payment processors. 

What that ignores is that the current cumbersome credit-card system has persisted in large measure because it enables people to buy things they can’t pay for with the cash they have on hand. 

It helps to remember that drugstores and grocers used to employ clerks in back rooms to track customers’ accounts and dun them for payments. The few points of interchange credit cards charged seemed like a far better deal. Handling cash, too, has cost and risk, from embezzling employees to fake bills.

Dee Hock, the technological visionary behind Visa, didn’t like to emphasize the lending aspect of credit cards. He didn’t even like the term “credit card,” according to Joe Nocera’s A Piece of the Action. But a key part of why credit cards took off is that consumers could make a purchase now and pay for it up to 30 days later, interest-free; merchants, meanwhile, got paid far faster than they might if they were the ones collecting on the debt.

Yes, all of that sounds slow compared to Bitcoin. But Bitcoin’s digital-cash-upfront approach doesn’t help consumers juggling mortgage payments and waiting for paychecks. The fact is that well-developed credit markets are clearly linked to increased economic activity.

That macroeconomic theory seems to work on the micro scale, too. Steve Allocca, the vice president in charge of PayPal Credit and related products, says that consumers who use a PayPal credit product spend an average of 30 percent more than they would otherwise. 

Even Satoshi Nakamoto, the mysterious inventor of Bitcoin, acknowledged in his first paper describing the Bitcoin protocol that the present-day system “works well enough for most transactions.”

Cash isn’t king. Cash flow is. 

Both A Borrower And A Lender Be

If you look at PayPal’s competitors, the most interesting rivals aren’t the ones trying to duplicate PayPal’s card-processing business, like WePay, Square, and Stripe. 

They’re companies you may not have heard of. Like Klarna, a primarily European business that lets customers pay after receiving an invoice—as Swedish and German consumers prefer—or over time. Or the soon-to-launch Affirm, a company started by PayPal cofounder Max Levchin, which promises to let buyers split payments over time.

Besides the renamed BillMeLater, PayPal also offers options like Pay After Delivery, which allows buyers to schedule a payment for 14 days out. It doesn’t charge fees but it requires use of a linked bank account, which makes the transaction far more profitable for PayPal.

A couple of weeks ago, eBay announced that it will take over the cobranded credit-card line it issues with GE Capital—giving it one more way of extending credit to consumers.

In March, PayPal’s then-president, David Marcus, told me about a bridal shop to which PayPal was loaning money to buy more inventory. That shop then lets brides pay for their dresses over time with BillMeLater. Marcus may be gone, but that vision of lending money on both sides—greasing the rails of commerce with credit—remains and is animating PayPal’s latest moves.

PayPal Working Capital has lent $150 million to date, says Darrell Esch, the company’s executive in charge of small-business lending, and is making $1 million in loans a day. So far 20,000 PayPal merchants have taken loans—approximately 10 percent of those who have been offered them. (Square has a very similar program, Square Capital, which it offers to retail merchants who use its card-swiping app.)

PayPal’s Worst Enemy

PayPal has many risks here. The chief risk is risk itself—the possibility that it will lend out money and not get paid back, whether by consumers or small businesses. 

Against that risk, it is wielding a decade-plus of data on consumers’ purchases and merchants’ sales, which Allocca says will let it make faster and better credit decisions than it might using credit scores and other traditional sources of data used by banks.

The other risk is complexity, the cruft of dozens of product launches, brand extensions, and acquisitions. ReadWrite has long noted PayPal’s cultural problem with imperial overreach. It wants to be in every niche within the payments world, and it seems to want that more than having a straightforward mission executed with a simple set of tools.

Marcus, who left PayPal in June for Facebook, departed with an unfinished effort to cut back on the company’s sprawling product lines. It’s not clear who’s wielding that ax now, since PayPal has yet to replace him. (eBay CEO John Donahoe is running PayPal directly on an interim basis.)

Here, the move to rename BillMeLater takes on more than just symbolic importance. PayPal Credit makes sense as part of PayPal’s core product—a flexible credit line joined at the hip with PayPal’s stored-value account. If PayPal can roll all of its cobranded cards and financing offers into one coherent product, it stands a far better chance of fending off Klarna, Affirm, and its other eager competitors.

It also points to how PayPal might make money in a Bitcoin future. Bitcoin may well drive down transaction costs over time. But digital cash won’t answer consumers’ and businesses’ need to pay for some purchases over time. It may be that moving money from point A to point B may not be PayPal’s long-term destiny. Fronting the cash to make commerce happen may be.

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