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PayPal is concentrating on Klarna with its Pay-in-Three service for purchasers within the UK

The PayPal application is displayed on an iPhone

Jaap Arriens | NurPhoto | Getty Images

LONDON – PayPal announces the launch of a "buy now, pay later" service in the UK that allows shoppers to fund their purchases through three interest-free monthly payments.

The U.S. tech giant may be better known for its online payment tools, but has evolved into lending in the years since it acquired the Bill Me Later credit platform.

Now the company is competing against Klarna from Sweden and Afterpay from Australia, whose point-of-sale loans have become increasingly popular lately. The company launched its "Pay in 4" product in the US just last month and is now offering a separate offering for the UK called "Pay in 3".

"What we have seen over the past 6 months is a significant increase in the shift from physical to digital transactions across the UK retail base," Rob Harper, director of enterprise accounts for PayPal in the UK, told CNBC in an interview.

"We have also seen the increase in the purchase price and payment for later solutions on the market. Brands like Klarna, but also smaller brands that are entering the market and not as recognizable as PayPal."

PayPal is betting that brand awareness will give it an edge over competing services like Klarna, Clearpay, and Laybuy. The company grew its customer accounts by 300% year over year in the second quarter and now has more than 24 million active users in the UK, dwarfing Klarna's nearly 10 million customers in the country.

In the UK, PayPal's new product offers three month installment plans for purchases between £ 45 and £ 2,000. It has signed a number of UK retailers to provide the service, including Crew Clothing, French Connection, Robert Dyas and Ryman.

Harper said the "Pay in 3" option was chosen because the British were paid monthly, as opposed to Americans who typically get their paychecks every two weeks. He added that PayPal was a "responsible lender" and would conduct "affordability checks" on transactions.

The move comes amid calls to regulate the fast-growing "buy now, pay later" sector. Some critics fear this could lead younger buyers into a debt trap. However, PayPal, Klarna, and other such companies claim they have adequate safeguards in place to avoid over-spending.

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