The New E-commerce Trend That Is Replacing the Credit Card

Thursday, September 09, 2021

Have you noticed any new options while shopping online over the past year?

I’ve been a PayPal (Nasdaq: PYPL) user since the early 2000s when it was the way to pay for all the cool things I’d find on eBay (Nasdaq: EBAY).

Normally, when I get to the checkout page, PayPal’s the first option I look for. It’s pretty much accepted everywhere, and most of my subscriptions — including Pandora and Netflix (Nasdaq: NFLX) — can be easily managed through PayPal.

But even though I use PayPal, I noticed the recently added “Pay in 4” option at checkout.

A lot of people are starting to take advantage of this new feature. And not just on eBay.

Buy Now, Pay Later

Added just a few months ago, this feature allows PayPal users to pay in four interest-free payments due every two weeks starting at the time of purchase. It has no impact on the purchaser’s credit score and approval happens in seconds.

I might’ve never noticed it if I hadn’t seen PayPal’s recent announcement to acquire the Japanese upstart, Paidy. The $2.7 billion deal is another push as PayPal seeks to deepen its reach into buy now, pay later (BNPL).

Paidy is unusual because it allows Japanese consumers to purchase items online and pay them off each month in person at local convenience stores.

I just learned today that this is incredibly important because even though Japan is home to the world’s third-largest market for online shopping, it’s also one of the few developed markets where paper currency is still king.

BNPL options are everywhere, apparently. I’ve just looked past them and habitually selected my pre-set PayPal options. But usage is surging worldwide amid the pandemic-fueled ecommerce boom.

The global BNPL market size was valued at $4.07 billion in 2020 and is expected to expand at a compound annual growth rate (CAGR) of 22.4% from 2021 to 2028.

The lack of both fees and credit checks makes BNPL attractive to those consumers with limited or low credit. And it’s attractive to millennials and Gen Z customers seeking convenient budgeting tools.

Last year, market research company Cardify conducted a survey of 6,500 adults, finding that 44% of customers said BNPL solutions play an important role in determining how much they spend over the holidays. Additionally, 48% said that BNPL solutions allow them to spend more than they would with their credit card.

So, where can we make money from this still-developing trend?

Well .. BNPL plans typically charge high late fees when the items aren’t paid in time. And there are also fees passed on to the merchant. Despite those fees, we know that merchants are going to want the opportunities for these sales.

Let’s take a look at a few of the players.

•  We’ll start with PayPal, who currently has a “B” Weiss Rating.

In the last three years, the company’s only slid out of the “Buy” range twice and stayed there only briefly. Shares are up 24.6% so far in 2021, and up 50.7% over the past year.

PayPal’s deal with Paidly is expected to close in the fourth quarter and will be paid for mostly in cash. I will definitely be keeping an eye on the fundamentals here to see if the deal ends up changing our rating of PayPal.

•  The next company on my list is Square (NYSE: SQ), which is making moves in the BNPL market.

Just last month, the company agreed to buy Australian BNPL firm Afterpay for $29 billion. This deal is expected to close in the first quarter of 2022 and valued Afterpay at more than 30% premium of its closing price prior to announcement.

Management clearly recognizes that this kind of payment flexibility is going to be integral to the future of ecommerce. As of June 30, Afterpay served more than 16 million consumers and nearly 100,000 merchants globally.

Just nine days ago, Square entered “Buy” territory for the first time ever according to the Weiss Ratings. It’s currently rated “B-.” Shares are up 21.9% so far in 2021 and up 84% over the past year.

•  Finally, there’s San Francisco-based Affirm Holdings (Nasdaq: AFRM).

The company operates as a financial lender of installment loans for consumers to use at the point of sale to finance a purchase.

It’s available as a payment option at retailers from Walmart (NYSE: WMT) to Saks Fifth Avenue, even on and Delta Air Lines (NYSE: DAL) vacations. And just two weeks ago, the company announced it would soon be available on (Nasdaq: AMZN).

Although founded in 2012, Affirm went public earlier this year and shares doubled within the first day of trading. But that excitement was short-lived. Shares are down nearly 6% this year. The company also currently has a “D” rating. That means it’s in the sell range, where it’s been since we had enough data to provide a rating back in April.

All three of these big players have the opportunity over the next several months and years to become the biggest player in the industry ... but even if the BNPL trend is only half as big as expected, there’s plenty of money to be made over the next few years.

Investors are sure to collect a piece of that revenue.


Kelly Green

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