(Bloomberg) — Russell Cummer was a credit trader at Goldman Sachs Group Inc. in Tokyo when he tried and failed to get a credit card.
It is a well-known story in Japan, especially for young people with no credit history. Cummer’s response was decidedly unusual: he eventually founded a company to give people an alternative to cards.
Paidy Inc., which includes Soros Capital Management and Visa Inc., is now one of the country’s handful of unicorns, privately held startups valued at at least $1 billion. It is one of the biggest players in the Japanese “buy now, pay later” sector, a business model that is enjoying a moment worldwide.
“It was so hard for me to get my first credit card in Japan,” said 41-year-old Cummer in a video interview. We decided to “become the credit card equivalent for those who don’t use credit cards.”
Buy now, pay later (BNPL) programs, another way to delay payments on purchases, have become extremely popular as the pandemic fueled a boom in e-commerce. Their zero-interest installment plans appeal to younger customers who are wary of the interest charged on credit cards.
Jack Dorsey’s Square Inc. agreed in August to buy Australian BNPL company Afterpay Ltd. to buy for $29 billion. Apple Inc. wants to build the functionality into its Apple Pay program, Bloomberg News reports, working with Goldman to provide credit. And Swedish player Klarna Bank AB, Europe’s most valuable startup, raised funds in June for a valuation of $45.6 billion.
But the model is also under scrutiny from regulators in the UK, with the Financial Conduct Authority saying earlier this year it will begin regulating the sector. BNPL has been criticized for encouraging people to spend more than they can afford.
Paidy’s services include an option to split payments into several interest-free installments, similar to Afterpay or Klarna. But one difference, Cummer says, is that customers in Japan often want to use cash, even when shopping online, and pay the driver on delivery.
“There is still a strong preference for cash,” said Cummer, executive chairman of Paidy, citing fears of credit card fraud as one of the reasons. “The biggest traders in Japan have understood that they need to solve this problem.”
Paidy acts as an intermediary between shoppers and merchants, paying the merchants in advance and receiving money from the customer later. It can be used in online shopping centers, including Amazon.com Inc.’s Japanese site, and launched a service in June for customers purchasing from Apple in Japan.
Traders’ transaction costs make up the bulk of revenues, followed by settlement costs. According to the company, late fines account for less than 5% of revenue.
Cummer said he went through “some very dark times” after he left Goldman and went out on his own. He founded Exchange Corp. started in 2008 as a peer-to-peer lender, but the company never got off the ground. He and former Goldman colleagues had to put in more of their own money to support it.
“I borrowed money from my father twice to pay the payroll,” he recalls.
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 is valued at $1.2 billion, according to research firm CB Insights, which says it is one of only six unicorns in Japan.
The company uses machine learning to evaluate the risk of transactions in milliseconds and takes on the credit risk itself, Cummer said.
Paidy is one of the main BNPL operators in Japan, although the market is smaller than Europe, the US or Australia, according to a report by Japan Research Institute Ltd in April. The Japanese BNPL market saw an estimated 882 billion yen ($8 billion) in transactions in the fiscal year ended March and is expected to top 1 trillion yen this fiscal year, according to Yano Research Institute Ltd.
When asked about the possibility of an IPO, Cummer said the company is exploring its capital structure to help it grow its business.
According to a report from CB Insights in March, annual BNPL transactions worldwide could rise 10 to 15 times to more than $1 trillion by 2025.
For an experienced Japanese investor, Paidy will likely expand as well, but there are questions about how long that will last.
“It’s likely to show solid performance for a while,” said Mitsushige Akino, senior executive officer at Ichiyoshi Asset Management Co. in Tokyo. “However, in the long run, many similar services are likely to be created and competition will increase.”
Asked about criticism of the business model, Cummer said Japan is already more tightly regulated than other countries because of the country’s experience with consumer finance firms charging huge interest rates.
And “we’re not in the business of extending credit to people who can’t repay us,” he said. Paidy declined to disclose his default rate, but said it was “very low”.
The Canadian said he learned a lot about risk in his Goldman days, comparing succeeding at a startup to the stamina it takes to last a long game of poker.
“You just have to stay at the table,” he said. “You’re out, you’re done.”
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