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1. PayPal (PYPL) -- KKR
Buy Now, Pay Later (BNPL) Receivables Sale
As it has told investors to expect, PayPal sold its portfolio of European BNPL receivables to KKR this week. Initial proceeds are set to be in the $1.8 billion range with KKR agreeing to purchase up to roughly $42 billion more in future European originations. With this cash, PayPal expects to buy back an additional $1 billion in stock this year ($5 billion v. $4 billion previously). As the deal was already in the works throughout 2023, it was part of the firm’s annual demand and margin guidance -- no changes there. PayPal will continue to underwrite and service the credit product as it has, but now won’t have to store the credit risk on its balance sheet anymore.
What does PayPal Get?
Besides the fresh $1.8 billion cash infusion, PayPal gets to enjoy the original perks of BNPL while eliminating its (and investors’) least favorite part of it. What do we mean by this? PayPal collects no interest on these loans, charges no late fees and doesn’t charge merchants for access to the product. It doesn’t really monetize it directly which is one of the reasons it has become so popular vs. other competition. Instead, PayPal benefits from the volume and engagement “halo effect” that this option brings. By offering its BNPL as another option for flexible consumer repayment, merchants see a 20%+ boost to transactions, a large basket size bump and a material lift in overall volume. This volume benefit feeds PayPal’s revenues and, considering BNPL skews to debut-funded transactions, helps its margin profile a bit too.
PayPal gets to keep enjoying all of these perks. Now however, it can do so without sacrificing its balance sheet flexibility to grow the segment. With its BNPL processing volume rising 160% Y/Y last year to $20 billion (and rapid share gains), the balance sheet bloat was becoming more pressing and this sale alleviates the eventual bottleneck. Simply put, the sale removes a limiting factor for PayPal’s credit growth and allows it to responsibly expand into more product adjacencies without creating excess risk.
Furthermore, PayPal is not a chartered bank. It cannot use deposits to directly fund its loans and instead must fund with equity capital, its cash position and debt. This gives it a slight access to capital and efficiency disadvantage vs. chartered banks. As a payments and technology company, it wants to focus on its strengths and core competencies there.
What does KKR Get?
If PayPal collects no interest and doesn’t charge late fees, why would KKR want this credit? How does it profit?
While we don’t have specific transaction terms, PayPal likely had to offer a slight discount on the receivables to motivate interest. It was likely willing to make this concession to cash out more quickly at slightly worse unit economics and prioritized flexibility today over slightly more margin tomorrow. This is the right decision in our view and one that KKR is happy to support.
It’s worth noting here that PayPal is the highest quality underwriter in BNPL. Its authorization and loss rates are both best in class via the extensive data it has on each customer to round out their profile and to predict repayment ability. Standalone offerings and tech giants do not have this treasure chest of highly relevant financial data to power these decisions. For that reason, the discount PayPal had to offer to attract interest in these assets was likely modest.
Looking Ahead
Leadership in the past had consistently hinted at wanting to sell all of its BNPL receivables. It told us it would start in Europe this year and likely expand elsewhere thereafter. So? There’s probably a North American receivables sale coming at some point to feed its cash pile and share repurchases.
2. Shopify (SHOP) -- Shop Pay
The News:
In the last two years, Shopify has opened its checkout accelerator (Shop Pay) to external surfaces like Meta’s Family of Apps and more. Any Shopify merchant was able to seamlessly offer this option with a click of a button. Shopify’s goal is to maximize merchant success and volume wherever it can. Successful merchants mean a more successful Shopify in a truly cohesive fashion. Because Shop Pay is 4x faster than the average guest checkout and delivers a 10%-50% conversion boost vs. all other choices, placing this button across the internet is a clear way to accomplish Shopify’s mission… So that's what it’s now doing.
Shop Pay will be available for any non-Shopify merchant site for the first time. Shop Pay has been added as a new component to its newer a la carte enterprise package (called Commerce Components by Shopify (CCS)) as a standalone offering. Per the release, this decision was in response to “strong demand from large retailers seeing the success of the buyer network.” This offers some confidence that the opening will be met with a warm welcome. We’ll see.
Why Does this Matter?
This could be materially positive news for a few reasons. The first is intuitive. Shop Pay is Shopify’s largest revenue driver within its merchant solutions bucket. By placing the best-in-class checkout flow (and its 100 million total users) within popular e-commerce sites, Shopify will surely find some market share to juice growth within this segment. The revenue has lower gross margin than its subscription business but comes with a similar EBIT margin which makes the growth just as compelling in our mind.
Again, within commoditized checkout, speed, clicks and confidence are the ways to standout. Shopify’s single click process (the result of its massive payment vault), ultra-low latency and fraud protection program all deliver these edges for merchants. Players like PayPal arguably offer deeper buyer and seller protections, but they’re still working on single click transaction completion.
Beyond the direct revenue boost, Shopify should gain significantly more touch points to drive product cross-selling. CCS merchants will frequently start with the single Shopify product; some will invariably end up with many more. Shop Pay is the perfect frictionless gateway product to open the door to more Fortune 500 brands. These brands simply want optimal consumer checkout choice and Shop Pay provides it. The consumer delight and tangible, incremental merchant success that it delivers should quickly shine. The added revenue and efficiency should leave many of these brands thinking “what else can Shopify do for me?” This is speculative, but really not much of a stretch. We’d be surprised if this didn’t play out.
Next, this evolution is somewhat similar to the path PayPal took to grow into an over $1 trillion volume payments juggernaut. It grew up as a tuck-in payment option to its parent company eBay while Shop Pay did so within its parent company Shopify. Not exactly the same dynamic, but similar. Opening up the PayPal button to the world was a key driver of PayPal’s exploding market share and volume throughout most of the 21st century. Now Shopify is following suit with a seemingly superior product offering. Could this be as impactful to this model as it was for PayPal? Time will tell but we like the strategy.
More Perks:
- Largest brands serve as signs of best practices for smaller brands to drive more SMB adoption.
- This will enhance Shopify’s customer data sources and profiles to improve other products like its credit underwriting and marketing suites.
Adyen:
As part of the news, Shopify and Adyen are deepening their already tight partnership. Large merchants routinely require global payment processes/methods to sell throughout the world. Shopify uses mainly Stripe and Adyen (and PayPal’s Braintree in France) to provide this flexibility and reliability. Stripe is the main partner for Shopify Payments, but Adyen offers key plug-ins to local payment methods (LPMs) like iDEAL in the Netherlands and others.
The deepening relationship will entail a more complete Adyen integration for large global enterprises to enjoy its full payment roster for optimal conversion. Interestingly, it will also include a joint go-to-market partnership to pursue larger clients.
Payment orchestration has become more important within commerce as processes have become more global and complex. For certain transactions, Shopify can orchestrate a transaction through Adyen’s processing network to close a purchase in the most profitable way for the merchant. Sometimes Stripe is the best, highest transaction margin option. By working closely with both, it ensures it can offer merchants the best choice a larger portion of the time. Another small source of making merchants more successful.
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3. Meta Platforms (META) -- WhatsApp and Regulation
a) WhatsApp
WhatsApp is debuting its “Community Entry Point” feature to allow users to navigate and see lists of groups and organizations linked to communities. WhatsApp is still in the early innings of finally ramping up monetization with its massive global user base. That monetization will entail things like messaging ads, new tools like fetching an Uber through the app and business profiles.
Brand discovery is a big part of making monetization as impactful as possible. By organizing WhatApp’s giant ecosystem into more intuitive, categorical groupings, these businesses will inherently become easier to find and interact with. This tool won’t be directly monetized, but makes extracting value from the WhatsApp ecosystem easier for Meta.
b) Canada
Canada’s Online News Act was passed into law. This law forces digital publishers to negotiate with news organizations to pay them for access to their content. Meta claims the law “ignores the realities of how the platform works.” It discounts the value of Meta’s unparalleled traffic to near zero while overlooking the immense value that news organizations get from plugging into that traffic for free. It creates inefficiency by creating arbitrary guardrails to value content rather than letting organic interest and impressions dictate that value like it should. While this is a bit annoying, it’s not all that material to Meta. With half the planet on its apps, 30 million users in Canada won’t be all that needle moving while they’ll still be able to use the services without this news content.