The Impact of Fintech Giants on Startup Opportunities

Initial plans involved waiting for Square’s Q1 earnings release to analyze the fintech landscape and its implications for startups. However, a more pressing concern arose regarding the potential limitations facing startups as major players demonstrate substantial growth in key areas.

Today’s focus will be on the buy now, pay later (BNPL) market, primarily examining PayPal’s first-quarter performance.

Analyzing the Competitive Landscape

PayPal’s BNPL results have garnered significant attention from fintech analysts, prompting a crucial question: Could the established platforms of companies like PayPal hinder the growth of startups attempting to gain traction in this space?

Several factors challenge this notion. Affirm, a BNPL-focused company, successfully completed its initial public offering (IPO). It transitioned from a startup to a unicorn before going public.

Furthermore, AfterPay also went public several years ago, and Klarna is potentially considering an IPO in the near future.

The Challenge for Emerging Startups

Currently, PayPal is actively competing with several established BNPL companies that were once startups. This raises concerns about the viability of newer entrants in the market.

Can these startups effectively compete? A deeper examination of PayPal’s results, alongside insights from AfterPay’s performance, will help assess the challenges facing startups. Further analysis will follow Affirm’s upcoming earnings report.

We will revisit these points after Affirm releases its financial data in the coming days.

Platforms and Startups: A Competitive Landscape

The notion that startups should avoid directly competing with established technology giants – the so-called “kill-zone” – doesn’t resonate with me. This is largely because smaller companies can successfully challenge larger ones. Furthermore, large corporations frequently degrade their own products, creating vulnerabilities that startups can exploit.

Zoom provides a compelling illustration of this. It effectively competed with numerous enterprise-level, platform-integrated video conferencing services by simply offering a functional experience. This leads to a crucial observation: as major tech companies seek incremental revenue increases from existing products, they often compromise quality to achieve marginal gains.

These larger entities often prioritize short-term economic benefits over long-term market dominance. Google serves as a prime example, transforming its search engine into a cluttered, advertisement-heavy experience to sustain growth. Recent news regarding Apple’s plans to expand advertising within the App Store echoes this same concern.

Therefore, I am not overly worried about the invulnerability of large tech companies. They are, at times, susceptible to disruption.

However, PayPal’s foray into the Buy Now, Pay Later (BNPL) market presents a different scenario. The core PayPal product suite is experiencing growth driven by broader market trends. Consequently, the company isn’t compelled to compromise its offerings with unnecessary features solely to boost short-term revenue.

Moreover, the BNPL market itself isn’t exceptionally difficult to penetrate. Developing a viable BNPL product isn’t an insurmountable challenge. Numerous companies globally have already demonstrated this capability.

Considering the relative uniformity of BNPL products, wouldn’t the advantages inherent in a well-established platform be significant? In essence, given the similarities across BNPL services, wouldn’t PayPal’s existing user base and integrated product lines position it for substantial success in this market, potentially to the disadvantage of startups?

I believe that is the likely outcome.

PayPal’s Q1 earnings report highlighted the following:

The infographic, though dated in appearance, illustrates PayPal’s key points.

The first bullet point emphasizes the leverage gained from PayPal’s extensive user base. The second point indicates that PayPal’s established position allows for product subsidization to drive segment growth. The third point underscores the company’s considerable scale and resource availability. The fifth point is particularly noteworthy, given the product’s launch in September 2020.

The remaining Q1 results provide additional data for analysis. Afterpay’s performance is equally impressive, with a global focus. Consider this:

Currently, Afterpay’s BNPL volume surpasses PayPal’s. However, PayPal is rapidly gaining ground.

With Klarna and Affirm also prominent players, three leading BNPL companies now face competition from a global fintech giant. This intense rivalry will likely spur innovation and competitive pricing, ultimately benefiting consumers.

But what about smaller companies seeking a foothold? Tillit is focused on BNPL solutions for businesses, a market Square will likely pursue. Plentina recently secured funding to develop BNPL for the Philippines, a market where PayPal already operates. How long before PayPal introduces its BNPL solution there? Consider Nelo, building BNPL technology in Mexico, a country served by both PayPal and Square.

As major fintech companies – whether originating in business services (like Square) or consumer markets (like PayPal) – expand their platforms to encompass a wider range of fintech products, we observe a “platform effect” that can make these large companies difficult to disrupt. Not impossible, but challenging. The key question is whether a disruptive force, akin to Zoom, exists within the BNPL space – a small, agile company with a groundbreaking idea.

If such a company doesn’t emerge, we may witness the larger players simply absorb new product categories, effectively stifling startups targeting specific markets or user segments, as may occur in the BNPL sector.

I previously discussed the platform effect in 2014. It’s now a well-established principle. However, we should apply this concept beyond just companies like Apple and Microsoft. Further insights will be available when Square and Affirm release their earnings reports.