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Uh-oh! PayPal BNPL is coming to Australia: How will Afterpay (ASX: APT) and Zip (ASX: ZIP) react?

Competition continues to build in the buy-now-pay-later (BNPL) space after PayPal Holdings Inc (NASDAQ: PYPL) announced that it will offer a similar BNPL service for its 9 million customers in Australia.

The response from the market was mixed, with Afterpay Limited (ASX: APT) rising 7% following the news, Zip Co Limited (ASX: ZIP) falling ~4% and Sezzle Inc (ASX: SZL) mostly flat.

PayPal’s BNPL offering

PayPal initially announced its intentions to move into the Australian market in September last year, so this news hasn’t come completely unexpected. However, more details have now been shared regarding PayPal’s pricing structure and how it compares to its rivals.

The offering will allow its customers to borrow up to $1,500 per transaction and repay the amount over 4 interest-free equal instalments, allowing it to avoid regulation around credit laws.

PayPal will generate revenue from transactions through fees that merchants already pay to PayPal – a 2.6% merchant charge + 30c for domestic transactions. This appears to be a slightly lower rate than fees charged by companies like Zip and Afterpay.

Late fees will be capped at $30 for purchases over $125, or $10 for purchases under $125.

What now?

It’s no secret that this space is becoming increasingly crowded. The product offering across most BNPL’s is extremely similar, usually being a certain number of interest-free instalments across a period. In order to remain competitive, will BNPL’s have to offer a better deal to merchants, causing their margins to further compress?

Afterpay is currently generating a net transaction margin (NTM) of just over 2%, so there doesn’t seem to be a whole lot of wiggle room if it were to offer an even more competitive fee to its merchants.

In saying that, AfterPay is expanding its product offering through platforms such as its mobile banking app Afterpay Money, so it might be less of a threat than some might think.

Rising long-term bond yields indicate expected inflation and signs of an economic recovery, but interest rates remain low for the time being.

However, given the interest-free nature of BNPL’s product offering, how would this be affected if interest rates do in fact rise at some point in the future? It’s a complicated question due to the different debt funding structures of some of these companies.

Afterpay has a significant debt warehouse facility whereas Zip’s receivables are packaged into securitised debt vehicles off-balance sheet. For a more in-depth comparison, click here to read: How I compare Zip and Afterpay shares.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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