Square’s $29 billion bid for Afterpay is setting it on a collision course with PayPal in the fight to be the go-to finance super app

• Square announced plans to acquire BNPL Afterpay for $29 billion on Sunday.
• The deal poses a new threat to PayPal, which launched its own BNPL offering less than a year ago.
• The two payments giants have been competing to win both merchants and consumers.

Square’s bid for Afterpay raised questions about the knock-on effect to the buy now, pay later industry, but some analysts say the deal poses a larger threat towards its biggest payments rival: PayPal.

Square announced on Sunday plans to acquire Australian BNPL Afterpay in a $29 billion all-stock deal.

Buy now, pay later is the fastest growing area in payments. It currently accounts for 2% of transactions in the US, and market share is expected to grow to 5% by 2024, according to FIS. The space has attracted interest this year from the likes of Goldman Sachs, Apple Pay, and Barclays, among others.

And while Square’s bid for Afterpay positions it as a formidable competitor against fellow BNPLs Affirm and Klarna, payments giant PayPal, which launched its own BNPL feature in October 2020, will face a bigger impact.

The push into BNPL by both sides indicates a desire to unite merchant and consumer-facing businesses to become the go-to financial app for users. They’re betting that new features — like buy now, pay later — will increase their apps’ popularity, leading to more merchant contracts.

PayPal’s stock has stayed relatively stable following the news. But long-term, the Square-Afterpay deal makes it a more formidable competitor to PayPal, experts said.

“This deal is a validation of PayPal’s strategy,” Lisa Ellis, general partner and payments analyst at MoffettNathanson, told Insider.

“If you think about Jack Dorsey copying Dan Schulman, that’s not something we’re used to seeing,” Ellis added.

The fight is still in the early stages. Consumer adoption of digital wallets is broadly growing, benefitting all players. In the near term, that’s good for PayPal, Ellis said.

PayPal’s BNPL feature is already off to a hot start, and has eyed global expansion with a recent launch in Australia. In less than a year it’s seen substantial adoption, thanks in large part to PayPal’s scale. Roughly 7 million consumers have used PayPal’s pay-in-four option since it launched last October.

But the momentum of broader adoption of digital payments will only benefit PayPal for so long because eventually, “there will just be more competition,” Ellis added.

Square’s bid for Afterpay represents exactly that, as the deal will enable Square to compete with PayPal on a global scale, something it’s been chasing, Paul Golding, payments analyst at Macquarie, told Insider.

“There is no coincidence, in our view, with respect to Square’s intentions to use Afterpay as a vehicle for leveraging more global recognition of its platform and utility for its customers,” Golding said.

PayPal declined to comment for this story.

Afterpay could help Square grow with both new merchants and new users

Square and Paypal have long competed for merchants and consumers.

PayPal is a leader among online merchants, with a checkout button present on 80% of the top 100 retailers in the US. Square got its start with in-person payments, its sleek checkout hardware popular among coffee shops and farmers market vendors.

They’re increasingly moving onto each others’ turf. PayPal is making a big push in-store via QR codes, and Square is adding more online services for merchants forced to adapt to e-commerce due to the coronavirus pandemic.

Through Afterpay, Square will gain access to a new group of larger enterprise merchants.

“What Afterpay could afford Square is access from a business-relationship perspective to a different type of merchant,” Golding said.

Afterpay has an exclusive BNPL partnership with Gap Inc., which owns Old Navy and Banana Republic. It also announced in June that select app users can use Afterpay at Amazon, CVS, Kroger, Macy’s, Nordstrom, and Target if they shop via its store directory.

The deal represents an opportunity for Square to “start off on the right foot” when it comes to bidding for payments contracts with Afterpay’s merchants, Golding said.

For consumers, adding Afterpay to Square’s Cash App interface could also prove helpful in tapping into a new market. Cash App’s user base has skewed toward the underbanked and lagged on the coasts. Afterpay’s user base tends to be middle- and higher-income millennials and Gen Z consumers, which lines up more with PayPal and Venmo’s users, Golding said.

Both sides have pushed resources into building out their apps. PayPal added crypto trading and has ambitions to add more banking products like high-yield savings accounts and stock trading.

Cash App, which has had crypto trading available since 2018, has experimented with retail embedded within the app.

Call it a “super-app” or not, “it makes sense to expect that the goal is similar with respect to these platforms,” Golding said.