When eBay paid $945 million for BillMeLater in October, we blinked. The business assigns credit at the point of sale to ecommerce customers who can’t use credit cards because they don’t have them, have maxed out credit limits, or choose not to. It charges fees much like a credit card – currently 19% interest.
The credit markets were already a wreck in October, with accelerating defaults on credit card accounts. And worse, the securitization markets were starting to shut down, meaning credit companies couldn’t get the debt off their books.
Still, a BillMeLater investor said not to worry. Their model is different than the credit card companies, he said, because they only issue credit on a per-transaction basis.
Fast forward a month and a half, though, and things are much worse. Credit default rates are expected to hit 10% next year as personal bankruptcies soar, and the securitization markets are flat out closed.
And I don’t really buy the argument that BillMeLater has a better model than the credit card companies. Card companies can (and do) lower credit limits in bad times, so they don’t have much more exposure on credit limits compared to BillMeLater. Also, most of BillMeLater’s customers don’t qualify for credit cards in the first place, or are tapped out. That makes this debt super sketchy. And BillMeLater’s credit models were created in a world of 5% default rates (the average over the last ten years), which are nowhere near as bad as what’s coming. On top of all of this, BillMeLater is pushing incentives that give people zero payments until April 1. What a teaser to buy stuff people can’t afford for the holidays.
This is adverse selection at work. People who don’t need to wait until April 1 to pay won’t use it. Those that do will, and those people are likely to be big credit risks.
At the very least eBay seems to have overpaid for BillMeLater. At worst they may have huge losses on the product next year. In 2008 they’ll do $1 billion in payment volume. You can do the math on a 10%+ default rate.
ebay has been shooting a lot of blanks lately.
they seem to be shooting themselves in the foot. even after the skype fiasco you would think they had learned something. they obviously have money to burn and there may be some insider trading of sorts involved here. i know they are smarter than this. i smell fish.
BillingLocator.com – get paid
And dig the April 1 due date, just in time to snatch that tax money, or snatch their refund with a fat late fee.
Most large American conglomerates are scams disguised as legal businesses that practice the adage of “The bigger the lie the more believable it is”.
Case in point: Enron, Lehman Brothers.
Just like the mafia except they don’t kill or cause physical harm to people (directly).
Another case in point. George Bush and WMD.
Oh wait. They do directly kill and cause physical harms to people.
No offence, though. I love American products.
So do I! I love em
Exactly. The Corporation is a psychopathic entity, according to the documentary of the same name.
Partially true. The acquisition seems overpaid because of this economy crisis, but we need to wait and see once things are stabilized.
Isn’t April 1 April Fool’s Day? Ha only in America would you give credit to someone who can’t afford to pay you back!
funnily enough it’s not only in America that this problem happens… how elese would we be in a GLOBAL financial crisis
LA Times today “Nationwide, 3.07% of prime mortgages were in foreclosure or at least 60 days late in the second quarter of this year, easily topping the previous record of 1.97% set in 1985.”
http://www.lati...8347,full.story
With unemployment hitting 8% I think defaults on every type of credit is going to continually rise.
What has ebay acquired other than paypal that has a proven route of success?
Skype?
Spammer
stubhub
If they back out, it would be pretty disastrous for the investors.
If the non-defaulters pay ~ 1 year after the transaction, then BillMeLater still makes money since (19% * 90%) > 10%. If they pay within 6 months though, the interest revenue won’t offset the default costs. Any idea what the average repayment schedule is like?
Woah…. an intelligent comment on TC? Never thought I’d see the day…
Yep.
Maybe I will start coming here again. 
Is there a chance that intelligent reporters will show up too? I think some mere signs of intellect in the audience can lure them… some day… maybe… at least one or two of them. 
hehe
Wow! Is eBay the worst company in the world for doing acquisitions or what (with the exception of PayPal)?? How can you pay $1 Billion for a credit service (but then again they paid the same for Skype)? It would be a lot easier to offer it yourself on the paypal platform and have lots of money left over to make bad credit decisions!
thanks for the common sense. something is fishy here.
ConspiracyLocator.com
Without knowing the financials (or even the actual default rates) for BillMeLater, it is not fair to criticize the purchase. It does seem like a crazy purchase price, but most people thought Myspace sold for cheap a few years ago and now it seems like a good deal. All that being said, it seems like bad timing since a bad economy means higher default rates no matter how good their formulas are, and higher default rates mean less profit for them.
“You can do the math on a 10%+ default rate.”
Seems pretty simple: charge 19% interest – lose about 10% to defaults = about 9% profit!
I don’t think it works that way. You only make the 19% if they owe for a full year, as Zohair pointed out. I can’t imagine taking out a YEAR LONG loan for something on ebay.
Although, as a seller, I can direct people to billmelater when they send me stupid-ass sob stories about how they can’t pay for the item they won.
Keep in mind even a 9% profit might not be enough to cover all the operating costs the company has (employees, servers, collections, office space, etc.).
Not true that BillMeLater’s customers can’t get credit: important to note is that BillMeLater’s average borrower is prime+, not the dregs of subprime.
And since BillMeLater can dynamically change their approval models, it wouldn’t be unreasonable to think they are shifting their models to be more restrictive as the economy went south to temper their exposure (just guessing, no facts here).
That’s a very different recourse strategy than the credit card companies, who have had to decrease credit limits and close accounts to reduce their exposure. It’s not unusual for credit cards to “go bad fast” with people quickly ringing up charges to their max line, too fast for credit card companies to understand and react to, and then default. BillMeLater’s model is very different.
All of that said, no idea if the purchase price makes sense: eBay has a history of buying companies for prices that seem overvalued at the time (yes Skype, but also PayPal): too early right now to tell.
Skype was a pretty odd acquisition but PayPal is the best deal they ever made!
Does make you think. What reasonable person would use billmelater if they had a credit card? Zero reasonable people would.
So what who is using it? Unreasonable people with credit cards and people who can’t get credit cards. Sweet.
I feel like ebay makes short-sighted stabs at profits to get their quarterly reports to spike ever so slightly (i.e., .10 cent auction listing days before the end of a quarter.) Is someone worried about being let go?
we can also ask, what reasonable person would use a debit card if they had a credit card? why not pay for something at the end of the month instead of immediately? several billion consumers disprove that rational theory every day.
Reasonable consumers do a lot of unreasonable things…using BML may be one of them.
There are many reasons to use a credit card over a debit card especially if you pay the full amount every month and therefore don’t get charged any interest fees.
1. Depending on your plan, you might have a limited number of transactions you can perform with a debit card before you get charged.
2. Again depending on your plan, you might be limited in the size of the transactions you can perform on a debit card.
3. Not paying for the item right away gives you a certain amount of security in case there has been a fraud and wish to cancel the transaction.
4. You keep your money longer thereby earning interest.
5. Simply as a means to simplify keeping track of purchases.
It can be very rational to use a debit card.
Most of the purchases you make are not going to be subject to fraud, gas, food, etc.
You can keep track of purchases just like a cc.
The interest you are giving up is minimal at best. The best reason is you don’t have to worry about getting ****** over if you forget to mail the credit card payment in. One mess up and you could cost you more than any interest you might be missing out on.
Jox, you got it backward. Bruce made the correct point that, in theory, people should use credit cards instead of debit cards and pay them off every month. But for whatever reason, people like Simple think it’s rational to use a debit card.
Aside from the trolling that some seem to be going on here, “simple” has a point that some seem to be missing: it is a *very* slippery slope to get caught up in credit card debt, even unintentionally.
The average American consumer has, what ~$6-8k in credit card debt. Not everyone is good with personal finances, and purchases on a credit card create an “out of sight, out of mind” environment for the expenses, which can give the average consumer over-confidence in their available liquidity. The trap with credit cards is that when the end of the month comes, you suddenly realize that the amount you spent on what you thought you “needed” was more than you have accumulated in earnings.
It is foolish to think that everyone has tons of liquid assets (cash) sitting in the bank. Many, many people live very close to their means.
And, yes, “simple” has a very good point: one mistake on your part, and you incur fees. Typically, incurring just one month’s fees would completely offset any potential mediocre savings you would receive by having that same money in your local bank account accruing 1.0% interest.
Credit cards have a place in your wallet. However, they aren’t the catch-all for one’s personal finances.
In the UK is it by far preferable to use a credit card in all situations. This is because the Consumer Credit Act in the UK makes the merchant and the card supplier jointly and separately liable for the transaction.
In other words if the merchant fails to deliver, or goes bust you can reclaim the money from the credit card company.
It’s also usually far easier to dispute fraudulent transactions on a credit card, with a debit card from a bank account once the money has been removed from your account that’s generally it and you won’t get it back.
i think we can’t say now that it was a mistake but we’ll find that out soon
You also need to take into account the potential synergy, with BillMeLater, eBay, Skype, and Paypal all integrated. So far that has not been done, but it opens up a lot of possibilities. I have bought several hundred websites over the past few years, some with the idea of trying to integrate them with existing sites I have, but I never got around to doing much of that, mostly because I moved onto other things instead. So, maybe eBay is in that same position, but my point BillMeLater can’t just be evaluated as a standalone company, it may get a boost from being part of eBay.
Of course it was huge blunder. That’s all eBay can do these days. Skype, StumbleUpon, BillMeLater – none of these services fit into “eBay” and all were acquired at a ridiculous price. I really do hope eBay crashes and burns soon because they are one company that just does not get it, at all, in any way. They are so web 1.0 that it pains me to even type about them.
Paypal acquisition, that made sense. Nothing else has.
80% of retailers who enable this service aren’t able to actually enable this service for their customers. No one qualifies! This is a little known fact. The service is really a marketing gimmick for retailers.
Re: eBay M&A team disasters
Skype
Craigslist
StumbleUpon
BillMeLater
Massive cash outlays. Meg Whitman is stupid cow. Pro McCain douchebag that tossed away billions. Why can’t the fukin revamp their UI and stop pouring cash into vc portfolio exit strategies. Wait. I know. Bc Whitman is an LP and is profiting indirectly by looting eBay shareholders equity.
Never mind.
Way to mess with their logo.
Well, BML demographic has a higher disposable income v. PayPal, and an ability to buy higher ticket items. The draw to BML is that you don’t have to input your credit card number, and you can pay in installments. So you can buy that huge flatscreen TV, which your debit card may not allow you to do, esp. on big ticket items that are over the daily funds limit. That being said, $945MM does seem like a pretty big outlay of cash. And doesn’t PayPal offer Pay Later? Isn’t that very similar?
ebay is where good ideas go to die.
Given ebay’s average take rate, the 10% default rate would still be cash flow positive on a gross basis (on incremental ebay.com purchase volume) even before discounting the cash flows from interest payments. The difficult math/human psych study is figuring out what amount is incremental volume versus cannibalized from less risky purchase funding options (e.g. PayPal eCheck, currently eBay’s most profitable purchase funding option).
Everybody thought eBay overpaid for PP back then…. and it’s now an amazing business. Even Skype, while overpaid is a 500M+/year business. This is way better than most recent big billions acquisitions in the Internet world….
People, do you know what is the main technique of moneymaking for a Credit Card company? It looks like you’ve never heard any of the multiple hearings in Congress/Senate, watch CSPAN from time to time.
The main goal of a CC company is TO MAKE THE CUSTOMER MISS A PAYMENT. Then they are legally alowed to fine him/her to death, increase APR up to 40% and even 65%.
That’s how the money’s being made by the industry. Late fees and increased rates after a missed payment.
$945 million… Wow. eBay are super idiots. Too much to pay, even if it’s a really good business. And it’s not.
PayPal is keeping eBay afloat right now. It should spin off away from eBay as a separate entity.
Read a blog, somewhere recently, that Amazon received $150 million for it’s stake in BML.
Not sure of their original investment amount.
It’s always interesting to see how ignorant people can make such bold statements about businesses they have neither investigated nor understand. The most obvious error that Michael makes is that he doesn’t even understand what that 10% credit loss rate means. It’s a percentage of the banks’ receivables, not their sales and never the twain shall meet. There are far, far less receivables that their are sales (I believe there are usually twice the sales). So yes, Mr. Arrington, go ahead and do the math. Why do they offer promotional financing? That’s usually because it attracts the best people (not unlike why credit card companies offer the best intro rates to the best customers). Same with other incentives. You have the adverse select model completely backwards, Michael.
Now all that crap put aside, did eBay overpay? It’s quite possible. Shit, I doubt they even know. Only history will prove that out. They obviously f’d up Skype but many thought Paypal was overpriced when eBay bought it. It’s funny how pundits always seem to know better.
Anyhow, given your rather obvious level of ignorance in consumer finance, Michael, perhaps its best if you leave these “deep” analyses to those who understand the industry. Twitter this ain’t.
I used ‘em to pay for tickets on hotels.com and saved a little, got a $50 gas card, and didn’t have to pay it back for 6 months. Scheduled the auto-withdrawal from my bank 2 wks before due and avoided all the interest. Thanks for the loan!
Lots of misinformation and poor analysis here. BML is much more similar to “private label credit” and “transactional credit” than it is to general purpose credit. In this respect, BML should have a better time managing risk. As some have pointed out, BML users are not necessarily the dregs who can’t get credit or who are maxed out. Most transational/private credit is doled out with major incentives, such as the “no payments till April” that we are seeing with BML. The bet is that BML can get enough people to not NOT pay off their bill by then so it can start earning fat finance charges. However a large percentage of people will pay off the bill and thus BML has extended a 6 month free loan. And a decent number of those who start revolving will end up getting charged off. It’s the nitwits who start paying the 19% and stick around that BML has to optimize.
Another decent point is that BML is good for high dollar transactions such as flat screen TVs which not only is potential BML revenue but also good revenue for the etailers and Ebay.
All that said, this looks like another dumb purchase by Ebay.
When all is said and done, I think Skype will actually prove to be a good acquisition, Ebay’s silly write-down notwhitstanding.
please look out farther than the tip of your nose.
The world is not coming to an end, and default rates will improve over the medium-long term. Did they overpay, likely yes knowing what they knew now, but consider your statement that credit card securitization is slowing. That would indicate that BillMeLater’s business should benefit.
As expected, Amazon.com says SeeYouLater to BillMeLater.
http://www.vend...elater-in-2009/