Russell Cummer was a credit trader at Goldman Sachs Group in Tokyo when he tried and failed to get a credit card.
It’s a common tale in Japan, especially for young people with no credit history. Mr Cummer’s response was decidedly uncommon: he ended up forming a business to give people an alternative to cards.
Paidy, whose backers include Soros Capital Management and Visa, is among the largest players in Japan’s buy now, pay later (BNPL) sector, a business model that’s enjoying a moment globally.
“It was so hard for me to get my first credit card in Japan,” Mr Cummer, 41, says. We decided to “become the credit card equivalent for those who don’t use credit cards”.
But Paidy has come a long way since Mr Cummer launched the BNPL platform. On Tuesday, PayPal said it will acquire Paidy for 300bn yen ($2.7bn) as it seeks to deepen a push into BNPL products. The acquisition will be “minimally dilutive” to adjusted earnings per share in 2022, PayPal said in a statement. The deal, which is expected to close in the fourth quarter, will be paid for principally with cash, PayPal said.
BNPL programmes, which offer another way to defer payments on purchases, have surged in popularity as the pandemic fuelled a boom in e-commerce. Their zero-interest instalment plans appeal to younger customers wary of the interest charged on credit cards.
Jack Dorsey’s Square agreed in August to buy Australian BNPL firm Afterpay for $29bn. Apple is looking to build the functionality into its Apple Pay platform, Bloomberg News has reported, partnering with Goldman to provide credit. And Swedish player Klarna Bank, Europe’s most valuable start-up, raised funds in June at a valuation of $45.6bn.
But the model is also under scrutiny from regulators in the UK, with the Financial Conduct Authority saying earlier this year that it will start regulating the sector. BNPL has faced criticism that it can encourage people to spend more than they can afford.
Paidy’s services include an option to break payments into several interest-free instalments, similar to Afterpay or Klarna. But one difference, Mr Cummer says, is that customers in Japan often want to use cash even when shopping online, paying the driver on delivery. The firm, founded in 2010, has 4.3 million active accounts.
“There’s still this strong preference for cash,” Mr Cummer, Paidy’s executive chairman, says, citing a fear of credit-card fraud among the reasons. “The biggest merchants in Japan have understood that they need to solve this problem.”
Paidy acts as an intermediary between shoppers and merchants, paying the merchants upfront and receiving money from the customer later. It can be used in online malls including Amazon.com’s Japanese site, and launched a service in June for customers making purchases from Apple in Japan.
Transaction fees from merchants make up the bulk of revenue, followed by settlement fees. Late charges account for less than 5 per cent of revenue, according to the company.
PayPal said Mr Cummer and Riku Sugie, president and chief executive officer of Paidy, will continue to lead the business. Paidy will also maintain its brand and operate its existing businesses.
Mr Cummer says he experienced “some very dark times” after he left Goldman and ventured out on his own. He formed Exchange Corp in 2008 as a peer-to-peer lender, but the business didn’t take off. He and former Goldman colleagues had to put in more of their own money to support it.
“I borrowed money from my Dad twice to make payroll,” he recalls.
Mr Cummer launched the BNPL business in 2014 and changed the company’s name to Paidy in 2018. It raised $120 million in its most recent funding round in March. It’s valued at $1.2bn, according to research firm CB Insights, which says it’s one of just six unicorns based in Japan.
The company uses machine learning to evaluate the risk of transactions in milliseconds and takes on the credit risk itself, Mr Cummer says.
Paidy is one of the main BNPL operators in Japan, although the market is smaller than Europe, the US or Australia, according to an April report from the Japan Research Institute. Japan’s BNPL market saw an estimated 882bn yen ($8bn) in transactions in the financial year ended March, and is expected to top 1 trillion yen this fiscal year, according to the Yano Research Institute.
When asked about the possibility of an initial public offering, Mr Cummer says the company is exploring its capital structure to be able to grow its business.
Annual BNPL transactions worldwide could increase 10 to 15-fold by 2025 to more than $1tn, according to a March report by CB Insights.
For one veteran Japanese investor, Paidy is also likely to expand, but there are questions about how long that will continue.
“It will probably show solid performance for a while yet,” says Mitsushige Akino, a senior executive officer at Ichiyoshi Asset Management in Tokyo. “Over the long term, though, a lot of similar services are likely to be created and competition will increase.”
Asked about the criticism of the business model, Mr Cummer says Japan is already more heavily regulated than other countries due to its experience with consumer-finance firms that charged huge interest rates.
And “we’re not in the business of extending credit to people that are unable to pay us back”, he says. Paidy declined to disclose its default rate but says it is “very low”.
The Canadian said he learnt a lot about risk in his days at Goldman and likens succeeding at a start-up to having the endurance required to persevere in a long game of poker.
“You just have to stay at the table,” he says. “You bust out, you’re done.”