Merchants and payment providers are looking for a smooth and easy checkout; regulators want full disclosure of the rules. PayPal in May agreed to pay $25 million in refunds and fines to settle a complaint from the federal Consumer Financial Protection Bureau, which alleged it signed up online shoppers for credit without their permission and forced them to use PayPal Credit rather than their preferred payment method. As part of the deal, PayPal said it would improve disclosure so shoppers understand what they're signing up for.
None of the online credit upstarts is moving more aggressively than PayPal, which got into the credit business in 2008 when it acquired BillMeLater, which offered shoppers the ability to pay within six months with no interest. That became PayPal Credit, which as of Sept. 30 had extended $3.4 billion in consumer credit.
Initially, the company offered a revolving credit line—like a credit card without the plastic. Last year, PalPal introduced Easy Payments in partnership with Comenity Capital Bank. So far, it has signed up a few big merchants, including Canon, Keurig and Shop.com in the U.S. as well as Apple in the U.K. Last year, purchases using PayPal credit surged 27 percent through Sept. 30, faster than overall transaction growth of 20 percent in the same period.
The company uses proprietary algorithms to make credit decisions based on each customer’s PayPal purchase history, so someone with a low credit score turned away by a bank might get credit from PayPal. The company’s vast database gives it an edge, said Steve Allocca, who runs the operation. PayPal processed $70 billion in transactions from 173 million customers in the quarter that ended Sept. 30.
"We have much larger scale and a rich treasure trove of proprietary data," Allocca said.
PayPal co-founder Max Levchin also sees opportunity in offering consumer credit for online purchases. He founded Affirm in 2012 to offer online shoppers credit for specific purchases and has attracted $325 million in investments from such firms as Khosla Ventures and Andreessen Horowitz.
Online mattress startup Casper is a major Affirm client, offering an $850 Queen mattress with no-interest financing that requires applicants to make six payments of $142. Affirm collects a fee from Casper on each sale. Most Affirm credit applicants are approved instantly after supplying their name, telephone number, last four digits of their social security number and date of birth. Those denied based on that are asked to give Affirm view-only access to their bank account so the company can determine based on their transaction records if they can make the payments.
Furniture is Affirm’s biggest category, followed by apparel.
Affirm was designed to be a transparent transaction with no hidden fees or escalating charges to appeal to millennials who may have seen their parents struggle with banks during the credit crisis, Levchin said. "A lot of our customers don’t want a credit card."
Casper met with Affirm before launching so it could offer point of sale credit for mattresses costing hundreds of dollars, CEO Phil Krim said.
"Extending payments over time, especially with no interest, is meaningful for consumers, whether they are buying cars, mattresses or jewelry,'' Krim said. "We see it as a universal offering that appeals to all ages.''
Sweden's Klarna started U.S. operations last year and plans to unveil a consumer credit offering with an unnamed bank partner this year. The company started in Europe by giving people 14 days to pay for goods ordered online, to help increase confidence in e-commerce since people would receive goods before paying for them.
The company considers more than 200 variables when analyzing a consumer credit request, including the type of device the consumer is shopping from, the time of day and where the order is placed. Merchants are eager to offer simple credit offerings on mobile devices to convert more mobile browsers into buyers, said spokesman Erik Engellau-Nilsson.
"The experience on mobile is still broken," he said.