A pedestrian walks past the PayPal logo at an office building in Berlin, Germany, March 5, 2019. REUTERS/Fabrizio Benschannounced a partnership
on Tuesday with financial technology firm PayPal , under which it will fund the short-term loans that PayPal offers to consumers at the point of payment, as an alternative to credit cards. It’s a cozy arrangement for all involved, and marks another step in private lenders’ encroachment into traditional financiers’ turf.
So-called “buy now pay later” loans are a fast-growing novelty: PayPal’s $6 billion in payment volume in the first quarter was 70% higher than a year earlier. Until now, the company had funded this effort itself, sending retailers money up front and collecting from customers in due course. KKR will now purchase and hold up to 3 billion euros of PayPal’s BNPL loans, originated in five European countries and typically a few months in duration.
PayPal benefits by shifting the funding of these loans off its balance sheet – including part of the $402 million in provisions for credit losses. It also gets about $1.8 billion in proceeds upfront, with $1 billion of that funding share repurchases. The value for KKR is more complicated. PayPal’s BNPL loans mostly don’t charge interest or fees, so KKR’s only way of making a profit is to buy them at a discount to face value – which could be substantial since funding costs in debt markets have risen. The risk it takes is that customers renege, but projections for consumer defaults are far from catastrophic. BNPL operator Affirm’s