Granting Credit: Is eBay's Bill Me Later Part of the Solution or Part of the Problem?

On the same day the public markets are tanking because of the spreading credit crisis, we see one of the biggest M&A exits of the year with eBay acquiring Bill Me Later for $945 million ($820 million in cash, plus an extra $125 million in options). This is for a company that lets consumers defer payment when they buy things online.  Remember, loose credit is part of the reason we are in the current economic mess.

So is Bill Me Later part of the problem or part of the solution? I put that question to Michael Kwatinetz, the former Wall Street tech analyst who is now a partner at Azure Capital, the biggest shareholder in Bill Me Later.  He explained to me how Bill Me Later works, and how it actually has more stringent credit controls than most credit cards:

The problem is people who can’t afford to pay for things are financing things. If you have the proper controls, you don’t allow that to happen.

We don’t grant credit limits. We grant credit on a transaction basis. If you are somebody who is not paying us, or running up your bills in other places, we don’t grant credit.

Traditional credit cards, in contrast, let you run up your bill up to a pre-determined credit limit.  With each transaction, Bill Me Later checks your credit score, credit outstanding, status with credit agencies, and a few other criteria.  And it either approves your credit or it doesn’t for each purchase in less than three seconds.  Kwatinetz says that the company tightened its lending policies about a year ago, and claims that the nonpayment rate is “probably the lowest of anyone on the Web.”

The value of the company lies in its algorithms that determine credit risk and in its ability to use the Internet as a platform for granting credit.  All of the data that its algorithms consider is pulled in via Web APIs from credit agencies and other data providers.

For eBay, Bill Me Later will help expand its Paypal franchise to consumer credit.  Bill Me Later is already used all over the Web by more than four million customers at places like Amazon, the Apple Store, JetBlue, and Walmart.com.  This year the company is expected to finance $1 billion worth of online purchases and bring in $125 million in revenues.  Revenues are estimated to be $150 million in 2009 (a 20 percent growth rate), but the acquisition will also be dilutive to eBay’s earnings, meaning the business is not yet profitable on a net income basis.

Still, you can see the appeal of an all-online credit service.  Traditional credit card companies pay about $150 for each customer who signs up for a new Visa or Mastercard, and it usually takes a couple weeks to process each account through the mail.  Bill Me Later acquires customers pretty much instantly at the time of purchase for less than 10 percent of what it costs the credit card companies.

Announcing a large acquisition like this that is essentially a foray into the troubled credit markets may seem counterintuitive, but after a string of deals that didn’t make much sense for eBay (Skype, StumbleUpon), this could end up being one of its smartest non-core acquisitions since Paypal.

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Comments

[redbaron:]

BillMeLater may be a great platform, but one has to wonder if this is really part of eBay's core compency. Ebay had it all at one time not so long ago, and all it had to do was keep doing well what it was doing, i.e., 'stick to it's knitting'. By branching out into other 'brands', they managed to lose a big part of their original business. In my humble opinion, this is just more of the same, from a management that has managed to screw-up one of the best on-line companies ever created. I have been part of eBay since late 1996, mostly selling, occasionally buying, and the company is just a shadow of what it could have been, had it stuck to it's original mission and strategy. IMHO

2008 Oct 07 01:36 AM

[J.Donahoe:]

We will be the best merchant company in the business. As the economy changes, so does our business structure.

2008 Oct 07 01:06 PM

[arlin:]

Mr Donnahoe.
I would like to know where you you intend to take Ebay?
After listening to one of your conference calls,I got the feeling many of those in the financial audience on the call wanted you to turn Ebay into Amazon.Is this the case?
You continually push the buy it now meme...........fixed price,fee format.etc.
Why would what was once the best Auction site on the internet want to be any thing but the best Auction site?
Why make Paypal more monopolistic,then it already is?Didn't you already loose this arguement in Australia?
I currently buy over $35,000 per year on your site,and the sellers I buy from are not happy,and are looking to leave Ebay......Are you listening?
I read all of your posts on this site,and I feel your ideas are not helping the selling situation on Ebay,and where will you be if they find another venue.

2008 Oct 15 05:21 PM

[User 324567:]

There won't be another option. The bigger picture (seeing forest for the trees), is that credit made online purchases the convenience they are today. As we migrate back to a cash and carry market, folks will have little choice but to grab the car keys and go get the items like our grand parents did.

2008 Dec 23 12:43 AM