Why the BNPL sector continued to plunge on Wednesday

Why exactly is Australia’s buy now pay later (BNPL) sector in freefall?

Broadly speaking: PayPal.

On Tuesday, global payments giant PayPal (PYPL) announced that it would be rolling out its own buy now pay later instalments product – simply called ‘Pay in 4’.

Centrally, with this new product, Paypal will allow customers to make purchases of between US$30 to US$600 and pay for them over a six week period – without incurring interest or other fees.

The company also noted that PayPal merchants wouldn’t incur any additional fees to enable the Pay in 4 offering to customers – with the pricing already included in the ~3% merchants are currently charged.

‘With Pay in 4, we're building on our history as the originator in the buy now, pay later space, coupled with PayPal's trust and ubiquity, to enable a responsible and flexible way for consumers to shop while providing merchants with a tool that helps drive sales, loyalty and customer choice,’ said Doug Bland, PayPal’s Senior Vice President of Global Credit.

The Pay in 4 offering is set to be rolled out during the fourth quarter of 2020.

Afterpay, Zip, Sezzle, Openpay share prices plunge

The prospect of a global and supremely well capitalised company entering the BNPL space looks to have spooked investors – with Afterpay, Sezzle, Zip, and Openpay all witnessing strong share price declines on Tuesday.

The sector continued to prove volatile on Wednesday – with many of these key stocks plunging further at the open – before recovering some of their losses as the session wore on. Afterpay traded down just 0.99% by 12:41 AEST, for example.

Across the board and looking at their current intraday lows, at one point:

• Afterpay hit $73.68 per share
• Sezzle touched $7.40 per share
• Zip fell to $6.74 per share
• Openpay traded at $3.66 per share

Elsewhere, in response to Zip completing its acquisition of QuadPay, analysts at Macquarie Wealth Management lowered their price target on the stock to $4.80 per share from $5.45 per share.

Besides flagging the potential impacts of a higher share count, Macquarie analysts also argued that PayPal’s BNPL offering may prove particularly problematic for Zip’s just acquired QuadPay.

Speaking of PayPal’s Pay in 4 product, the investment bank said:

‘This appears to be a lower-cost offering for both merchants and consumers for a very similar product to QuadPay’s,’ with it being added that ‘a lack of differentiation could limit the ability for QuadPay to increase their customer numbers at the same rate as larger peers’

Secondly, analysts from UBS have remained sceptical on both Afterpay and Zip in the wake of PayPal's announcement – reiterating their Sell ratings on both stocks. UBS currently has a price target of $28.25 per share on APT and $5.70 per share on Z1P.

We compare and contrast Zip and Afterpay's FY20 results here.

Analysts from the Swiss bank warned:

‘The faster BNPL grows and succeeds it will inevitably attract new competition and/or regulation, that will either reduce the economics currently enjoyed by participants, or limits their long term growth potential.’

What are your thoughts on the BNPL sector…

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