PayPal takes on Afterpay with fee-free buy now pay later: Will Pay in 4 work?

Are you eligible and what's the catch?

PayPal has stepped up its challenge to market leader Afterpay, launching its own buy now pay later service which doesn't charge any late fees.

Pay in 4 will be available to all existing PayPal customers in Australia, both consumers and businesses, from today. Like Afterpay and similar services, it allows customers to pay off purchases in 4 equal fortnightly instalments. Unlike other Australian rivals, it charges no late fees if customers miss a payment.

Late fees have been one of the most controversial features of the buy now pay later landscape. Critics claim that they result in significant debt for consumers who overstretch themselves. The services maintain that their profitability comes not from late fees but from charging merchants for a percentage of each transaction.

However, late fees aren't a trivial expense. 2019 research by ASIC found that 1 in 5 buy now pay later customers end up paying late fees, costing us more than $43 million a year.

When PayPal announced its launch plans for Pay in 4 back in March, it too was planning to charge late fees, though at a slightly lower level than Afterpay. Late payments would have incurred a $10 fee, just once for purchases under $125 and up to a maximum of $30 if 3 or more payments were missed for a purchase above $125.

PayPal changed its plans after conducting consumer research, which found the fees were a significant turn-off and a major reason why 50% of Australians haven't yet tried buy now pay later.

"We believe it's the right thing to do," Andrew Toon, general manager payments for PayPal Australia, told Finder. "We trust the strength of our systems, data and processes to take that no-fee approach."

PayPal also lowered the minimum transaction value for Pay in 4 from $50 to $30 following the research. The maximum amount for a Pay in 4 transaction is $1,500.

Pay in 4 was originally scheduled to launch before the 2021 end of financial year sales, but the change to the fee model caused a slight delay, Toon told Finder.

How do I sign up for PayPal Pay in 4?

Any business that currently offers PayPal as a payment option will have access to the service without any additional charges. So if a site has a Pay with PayPal button, the option to use Pay in 4 will appear when that's clicked if a consumer has been approved. Customers can choose any debit or credit card associated with their PayPal account as the source of the payments.

PayPal determines if customers are eligible by examining previous transaction histories and general spending patterns. Toon didn't share details of exactly who qualifies, but said external credit histories might be checked in some cases.

PayPal is hoping its existing relationships with a wide range of businesses and government bodies will mean that buy now pay later extends from its traditional market of fast fashion and homewares into other categories. For instance, it could be used for car registration or travel bookings, Toon said, with PayPal research showing 44% of people were interested in using the service to pay for travel. That has been a slower market for buy now pay later, though there are some choices available.

Businesses won't have the choice of opting out of Pay in 4 if they offer PayPal as a payment option. "It's an intrinsic feature of the wallet," Toon said. However, businesses aren't barred from offering other buy now pay later services if they wish.

PayPal is confident the venture makes sense, even though it doesn't charge businesses anything extra on top of its existing merchant fees to use the service. "We are a platform that brings buyers and sellers together," he said. "The more versatile our wallet is, the more engaged our customers are."

How will this impact Afterpay?

Afterpay is easily the largest buy now pay later service in Australia, with 73% of the total market by dollar value, according to corporate regulator ASIC. That gives it a clear competitive advantage.

However, PayPal does have the advantage of an existing user base of 9.1 million Australian customers. A large percentage of them will be eligible to use Pay in 4 without requiring a separate sign-up process.

Finder's Consumer Sentiment Tracker shows that a typical Aussie has used buy now pay later twice within the last 6 months. With PayPal entering the scene, that number is likely to go up.

Other alternatives have also emerged as a reaction to the growth of buy now pay later. Credit card companies have responded with no interest credit cards, which don't charge interest but also have late payment fees.