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Here's Why I Like PayPal's BNPL Strategy More Than Square's

By Matthew Frankel, CFP® – Sep 28, 2021 at 6:23AM

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Both companies are making a push into the red-hot BNPL space but are using different tactics.

To put it mildly, the buy-now-pay-later (BNPL) industry is on fire lately, so it's not surprising that fintech giants PayPal (PYPL 0.13%) and Square (SQ 0.48%) both want a piece of the action. However, they're taking very different approaches: PayPal has built its own BNPL business from scratch and is growing it through bolt-on acquisitions, while Square is spending aggressively to simply acquire a ready-made BNPL business all at once in the form of Afterpay.

In this Fool Live video clip, recorded on Sept. 13, Fool.com contributor Matt Frankel, CFP, explains to Industry Focus host Jason Moser why he's more of a fan of PayPal's approach. 

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Jason Moser: Well, speaking of buy now pay later and pivoting over to the other side of the spectrum here, PayPal also last week announced an acquisition that they are making. It's a relatively small acquisition comparatively speaking, at least. But Paidy, a Japanese buy now pay later firm, PayPal is going to be acquiring Paidy and bringing that into their network. I believe $2.9 billion was the deal. They're primarily financed with cash there on PayPal's part. Not a big acquisition for a business like PayPal in considering that they have already built their own buy now pay later offering.

Some may ask, well, why would they buy this as opposed to just expanding their offerings? Oftentimes, just getting into another geographically area of the world can be a lot more difficult even if you've built something that's showing the promise, that the PayPal's buy now pay later offering is showing today here domestically, being able to roll that out around the globe is a little bit of a different ask. It seems like they are buying that share into the Japanese opportunity. But looking at the numbers, it seems like a very reasonable bet on PayPal's part.

Matt Frankel: I like this a whole lot more than I like Square spending $29 billion on that. Not just because it's one-tenth of the price, I like the strategy of it better.

Moser: Move the decimal over just one and men, I'd tell you it looks a lot better than this. 

Frankel: Well, it's a bolt on acquisition. Unlike Square's which is trying to establish buy now pay later from scratch, PayPal has already done that. PayPal has already built a buy now pay later platform. Now they're just trying to optimize that I guess you would say. This gets them into the Japanese market. It gets them pay these proprietary technology.

Paidy uses proprietary technology to underwrite their loans to assess credit worthiness. They have their own credit scoring method to determine consumer credit that could be ultimately applied around the world. It's an impressive platform. They're the leader in the Japanese market, which is the number three economy worldwide for e-commerce by the way. It gets them a big head start in that market.

Square is not an international company at this point. After pay is in a few markets, they're primarily Australia and the U.S. where Square already is. It doesn't really open up the global. PayPal is already a global company. I like it they could take this leader in one really strong market and apply it to the a 100 plus countries they operate all over the world. It seems like a better use of capital than just spending $29 billion to buy an established buy now pay later service. That's just my opinion. This is coming from a Square shareholder.

Moser: Well, this is coming from a Square and a PayPal shareholder. I tend to agree with you. When I look at this acquisition, it's certainly a lot easier to the stomach. If it doesn't work out, that's not good, but it's not something that really moves the needle for PayPal either way. But to your point, being able to take this and even extending the proprietary technology that they get, extending the IP that they gain from this acquisition to a global scale, it could be very meaningful over time.

In particular, when you look at the Japanese market, I found this pretty fascinating, Japanese market is still very cash heavy. It's around 70% of all purchases are still paid for in cash. Japanese people as a culture, it would seem are much more debt averse than probably others. Not to say that's a bad thing at all, but it is probably a challenge that they'll have to overcome in convincing people that, hey, this is a way that you can purchase what you want to purchase if you want. If you have 70% of all purchases is still paid for in cash, well that means you probably have a lot of room to change people's minds and show them there's another way.

But by the same token, maybe it's a little bit easier said than done. But probably, we want to see that number come down over time for this to be an acquisition that really moves the needle at least from a Japanese market perspective.

Matthew Frankel, CFP owns shares of Square. The Motley Fool owns shares of and recommends PayPal Holdings and Square. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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