Sometimes, companies that aren’t banks find themselves in the lending business. Offering financing helps customers make big-ticket purchases or buy more items at once, benefitting both the business and the borrower.
However, loans can complicate things. If a company has too much debt on its balance sheet, the market might start treating it like a bank, rather than, say, a fast-growing tech company. Plus, the returns from loans usually do not match the return potential by investing in new technology, making a strategic acquisition, or buying back its own shares.
So, how can companies keep offering their customers financing while also using their capital more efficiently?
PayPal’s Solution: Credit Externalization
PayPal is one of a growing number of companies that solved this challenge with what is known as a credit externalization, a form of asset-based finance (ABF). In 2023, it sold its European “Pay Later” loans to KKR’s Asset-Based Finance (ABF) team and set up a process to continue to sell loans in the future.
PayPal launched the PayPal Pay Later program in select countries in Europe (United Kingdom and France) in 2020, allowing customers to split purchases into installments. The program quickly expanded to more countries, encouraging higher spending and greater customer loyalty.
As the program grew, PayPal saw an opportunity to put its money to better use. By selling its book of European Pay Later loans to KKR, PayPal retained the ability to offer its customers the convenience of financing while redirecting its capital toward growth and strategic objectives. PayPal remains in charge of originating the loans and managing customer relationships, while KKR securitizes the assets.
As for our investors, they gained access to a highly diversified pool of short-duration loans, involving millions of customers and merchants and backed by PayPal’s deep insights into customer behavior and lending criteria established through hundreds of millions of transactions between millions of customers and merchants.
Navigating Complexity: Hundreds of Millions of Transactions
The scale of PayPal’s operations made this transaction…complicated. With 400 million customers and a large number of merchants across five countries, the data was massive: 300 million transactions that couldn’t fit into a spreadsheet.
When our credit team was performing due diligence on the loan program, we received access to payments information on every loan ever generated in the PayPal Pay Later program. The KKR technology team developed software to analyze this data, build pricing models, and adjust the models weekly based on new data. Payment data isn’t simple to analyze: If someone orders three things on the same day, but they don’t all ship the same day, it might show up as three separate payments. Returns must also be reconciled.
The Value of Partnership
Executing a transaction as complex as the PayPal Pay Later credit externalization requires scale, expertise and a collaborative approach. It also requires a true sense of partnership to develop models that not only offer fair terms to the sellers and risk mitigation to the buyers, but also allow for flexible systems that adapt to a constantly changing consumer world.
The partnership has recently been upsized and extended.
For companies like PayPal, credit externalization unlocks capital for growth. For investors, it provides access to a diversified pool of consumer debt that they couldn’t reach otherwise. We see it as a smart solution for everyone involved.
