Usually, David Toraya, a 24-year-old logistics coordinator in Tennessee, would shop online using his debit card. But recently, while between jobs and low on cash, he ordered clothes and tennis shoes from Nike.com after applying for PayPal Credit, which let him pay the balance off with no interest over six months.
“I have a credit card but I don’t necessarily trust card companies with balances,” Toraya explained. With PayPal Credit, he felt comfortable about its promise that he wouldn’t be charged interest if he repaid the loan within six months.
People like Toraya are making PayPal’s (PYPL) credit business one of the company’s fastest growing individual services. From Thanksgiving through the following Monday, known as Cyber Monday, U.S. shoppers used PayPal Credit for more than $166 million in purchases, an increase of 32% compared to the same period last year. Payment volume through the third quarter of 2015 for PayPal Credit was up 27%.
In fact, the company said that PayPal Credit is growing faster than its overall business.
But while PayPal Credit is gaining traction, it’s also one of PayPal’s most controversial services. Earlier this year, the federal Consumer Financial Protection Bureau reached a settlement with PayPal that it return $15 million to consumers and pay a $10 million fine for allegedly misleading borrowers.
PayPal was accused of deceptively signing up tens of thousands of Credit customers who thought they were registering for a regular PayPal account, according to CFPB’s director, Richard Cordray. He also said that PayPal failed failed to fix the problems when customers complained.
Steve Allocca, vice president of PayPal Credit, said the company is working to be more transparent.
PayPal Credit is the successor to BillMeLater, which PayPal’s parent at the time, eBay, acquired for more than $1 billion in 2008. The idea was to expand the company’s financial offerings, help merchants get more business, and beef up its fraud detection tools. In the past two years, PayPal has rebranded BillMeLater to PayPal Credit, and introduced a program to also lend to businesses.
Allocca explained that offering services like credit help set PayPal’s payments service apart from rival digital wallets. Allocca is referring to PayPal’s core digital wallet, which has 173 million active users and processed 1.2 billion payment transactions in the third quarter.
Merchants who accept PayPal as a payments option can also choose to make PayPal Credit available to their customers in two different ways. First, shoppers who buy $99 or more using PayPal Credit can avoid being charged interest if the balance is fully paid within six months. After that, borrowers are charged a 19% interest rate.
In 2014, PayPal debuted a second way for shoppers to borrow whereby they can choose between 6, 12, 18, or 24 month payment plans with a fixed interest rate of 12.99% for purchases above $250.
Beyond checking borrowers traditional credit scores to determine credit-worthiness, PayPal has also started looking at social data from Facebook and other apps. Having an active Facebook profile over time signals that you’re more likely to be a real person rather than a fraudster, for example, and therefore less of a risk.
“We are using any data we can get our hands on,” said Allocca.
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Allocca attributes the recent growth in PayPal credit to growing distrust of traditional credit, particularly among millennials. Consumers are worried about hidden fees and complicated terms, he said.
Millennials listed the four biggest banks as among the 10 least-loved U.S. brands, according to a recent Viacom Media company research study of around 10,000 respondents. In addition, the study found that 53% of millennials don’t think their bank offers anything different than other banks. And 71% said they would rather go to the dentist than listen to what banks are saying.
“It’s one of the things we are most excited about,” Allocca said about appealing to younger users. “Millennials want credit options that are digitally native as they are.” He added that millennials now account for 33% of PayPal Credit users, up from 25% two years ago.
For merchants, PayPal claims that offering Credit helps their sales. For example, shoppers who use Credit typically spend 25% more than average orders, the company said. Eddie Alberty, the CEO of shopping marketplace Shop.com, said that he’s seen a 20% increase in size of orders from shoppers using PayPal Credit, and more of these borrowers buying higher priced items, such as TVs.
But some merchants are not so bullish about offering PayPal Credit. Apple recently removed its PayPal Credit Easy Payments option without explanation in its online store after offering it for nearly a year.
Merchants adoption of Credit, especially large retailers, will be crucial to the service’s growth as a business, explained Sucharita Mulpuru, an analyst at Forrester. “Its growth is heavily tied to new merchants that integrate it,” she said.
In the most recent quarter, PayPal had $2.25 billion in revenue overall. The company declined to reveal how much Credit contributed, but it said that it was “significant part,” said Allocca.
PayPal Credit is also feeling the heat from one of its co-founders, Max Levchin, who recently debuted a credit service aimed at millennials, called Affirm. Similar to PayPal Credit, Affirm lets people obtain a loan at checkout instead of using a credit card. But its interest rates can be lower than PayPal’s, and it charges an upfront fee.
In the future, PayPal plans to continue expanding Credit by offering specific loans for types of items, such as furniture or electronics. “The goal is to be more personal with our borrowers,” Allocca said.
