On September 7, PayPal Holdings, Inc. (NASDAQ:), a U.S. payment company, announced the acquisition of Japanese unicorn Paidy, Inc., a buy now, pay later (BNPL) service provider, for $2.7 billion.

Paidy is a Japanese payment company that allows Japanese users to shop online and later pay via bank transfer or convenience store.

It does not charge interest and only charges a small amount of interest. This has helped it grow in popularity.

With the acquisition of Paidy, which caters to 4.3 million active customers, PayPal intends to tap into the world’s third-largest online shopping market – Japan. Paidy is due to close by the end of the year. The cash payment will fund it.

As PayPal seems to be successfully executing its international expansion plans, I am still bullish. (See PYPL stock charts on TipRanks)

PayPal’s Foray into BNPL

Over the last several years, BNPL has become a popular method of financing, and the demand for such solutions has accelerated due to the virus-induced recession.

By 2028, the BNPL market will be worth $20.4 trillion. PayPal created a BNPL platform in the United States called Pay in 4 in July 2020. It has been used for $3.5 Billion in purchase transactions.

PayPal is now a market leader in the BNPL space. On July 13, Pay in 4 was launched in Australia. Management’s confidence has been raised by the early successes of the payments system. It is also trying to expand its reach into international markets.

PayPal wants to be the most popular method of payment in Japan where the online shopping market has tripled over the past 10 years, to nearly $200 billion. Even with this phenomenal growth, over two-thirds (23%) of Japan’s online shopping volume is still done using cash. This highlights the huge opportunity for other payment providers to enter this market.

Many e-commerce businesses are now partnering with BNPL platforms in Japan as a result.

The availability of interest-free payment options is another factor that influences customers’ choice for BNPL. BNPL service providers earn their money by charging merchants a fee for providing customers short-term financing they can pay back in installments. Customers do not have to go through a credit screening.

Paidy will expand PayPal’s reach and influence in Japan’s payments sector. It will also strengthen the company’s cross-border ecommerce business.

Paidy guarantees merchant payments and underwrites transactions using machine learning and proprietary models. Paidy 3-Pay, the Japanese unicorn that offers monthly payments via a unique product, has increased engagement with more than 6,000,000 customers. It has also attracted major partnerships with top brands worldwide and online marketplaces.

Paidy will operate and protect its current business as well as its brand, after the PayPal acquisition.

Wall Street’s Take

Soon after PayPal announced the acquisition of Paidy, many Wall Street analysts, including Citi analyst Ashwin Shirvaikar, Mizuho Securities analyst Dan Dolev, Oppenheimer analyst Dominick Gabriele, and BTIG analyst Mark Palmer released research notes in which they commended PayPal’s management.

PayPal has a lot of potential growth opportunities in Japan, as 70% of Japanese purchases are still made with cash.

The average price target for PayPal is $337.70 according to 26 Wall Street analysts, which represents 19.3% potential upside.

Takeaway

The online payments industry has benefited greatly from the stay-at-home economy in the last 18 months, and this trend can be expected to continue in the post-pandemic era as well.

Paidy will be a platform that PayPal can use to expand its reach in Japan. In addition, the company may continue to search the Japanese market to find more opportunities for international acquisitions.

Disclosure: Dilantha De Silva didn’t hold any positions in the securities listed in this article at the time it was published.

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