Key Takeaways:
Non-bank companies offering financing often prefer to allocate capital to higher-return opportunities.
In 2023, PayPal sold its European “Buy Now, Pay Later” (BNPL) loans to KKR, continuing to sell loans weekly.
This transaction allowed PayPal to free up capital for strategic growth, while KKR Credit gained access to a diversified pool of short-duration consumer loans in a fast-growing market.
The complexity of the transaction required KKR’s technology team to develop software that analyzed massive amounts of data to price the loans accurately.
Some companies outside the traditional banking sector end up offering loans to customers, which can be a great way to drive sales and enhance customer loyalty. For example, financing options allow customers to make big-ticket purchases or buy more items at once. However, offering loans can complicate things for these companies. If they accumulate too much debt, the market might start perceiving them as a bank, rather than a tech or e-commerce company. Additionally, loans typically yield lower returns compared to investments in new technologies or acquisitions.
So, how can these companies continue offering financing without overextending their balance sheets or tying up too much capital in loans?
PayPal’s Solution: Credit Externalization
PayPal tackled this challenge with a strategy known as credit externalization, a form of asset-based finance (ABF). In 2023, PayPal sold its portfolio of European “Pay Later” loans to KKR’s ABF team, setting up a process to continue selling loans on a recurring basis. The Pay Later program, launched in 2020, allowed European customers to split purchases into installments, leading to increased customer spending and loyalty.
As the program grew, PayPal realized it could deploy its capital more efficiently by selling the loan book to KKR, while still offering customers the same financing options. PayPal retained control over originating loans and managing customer relationships, while KKR took over securitizing the loans. This enabled PayPal to direct its freed-up capital towards growth and strategic initiatives.
For KKR, this deal provided access to a highly diversified pool of short-duration consumer loans, offering exposure to millions of customers and merchants. PayPal’s deep insights into consumer behavior and its established lending criteria further strengthened the value of this asset for KKR.
Navigating Complexity: A Data-Heavy Process
Given the sheer scale of PayPal’s operations, executing this transaction was not simple. With 400 million customers and numerous merchants across five countries, the volume of data was immense—around 300 million transactions that couldn’t fit into a typical spreadsheet. During the due diligence phase, KKR gained access to comprehensive payment data from every loan generated through PayPal’s Pay Later program.
KKR’s technology team had to build custom software to analyze this vast data, develop pricing models, and adjust them weekly based on fresh transaction data. The complexity of the data came from various factors—such as multiple items being purchased in one transaction but shipped at different times, or the need to reconcile returns, which added layers of complication.
The Value of Partnership
This credit externalization deal wasn’t just a financial transaction—it required scale, expertise, and collaboration between PayPal and KKR. The partnership helped develop models that balanced fair terms for both parties, risk mitigation for buyers, and the flexibility to adapt to a dynamic consumer market.
The partnership has now been expanded, further increasing the scope and scale of the transaction.
For companies like PayPal, credit externalization offers a smart solution to unlock capital for growth without neglecting their core financing offerings. For investors like KKR, it presents an opportunity to access a diversified pool of consumer debt that would otherwise be difficult to tap into.
Overall, this strategy exemplifies how non-bank companies can leverage asset-based finance to optimize capital use and provide attractive investment opportunities for investors.
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