PayPal is one of the most popular ways to pay for things online, helped by its frequent offers to lend a consumer a few bucks to cover a purchase. But on Thursday, PayPal announced it was selling its entire consumer loan portfolio to Synchrony Financial, the lending unit spun out of GE Capital in 2014, and getting out of the business of extending credit to consumers. PayPal still wants to help people pay for purchases, so how will it offer loans in the future?
Will you still be able to borrow money to make a PayPal purchase in installments?
Yes. The company is keeping the little purple box offering an installment loan that appears at the bottom of a retailer’s web site when a customer decides to pay with PayPal. Customers who’d rather pay for that new washing machine over six months, for example, will still be offered that option when they use PayPal on a retailer’s web site.
So what isn’t PayPal doing anymore?
What’s changing is where the money comes from to make the loans and who collects the interest, typically 20% annually. PayPal decided that tying up large amounts of its capital (the loan portfolio sold to Synchrony totaled $6 billion) for lending wouldn’t provide as high a return on investment for the company as using that money for other projects. PayPal’s payments processing and merchant services generally provide higher returns. “We want to invest in growth,” PayPal CFO John Rainey told the Wall Street Journal. “That $6 billion can be reinvested in higher-returning alternatives.”
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The lending also was starting to freak out Wall Street analysts worried about losses from borrowers who couldn’t repay their loans in tougher economic times. Already, the loss rate on PayPal’s loans had climbed to 6.4% a year from 6% last year and 5.6% in 2015. PayPal said it was keeping for now much smaller portfolios it had accumulated from lending to small businesses and non-U.S. consumers.
Who will fund the loans to PayPal customers?
That will be Synchrony’s (SYF) job. The company is already a leading provider of private label consumer credit cards and has almost $80 billion of outstanding loans. That gives Synchrony much bigger scale than PayPal, helping profitability, and greater diversification of borrowers, which at least in theory should make its portfolio more recession-proof.
PayPal is losing out on revenue from the interest, so why did its stock price go up?
PayPal’s shares were up almost 5% to an all-time high of $76.84 in midday trading on Thursday. Part of the excitement was that it was getting out of a business that Wall Street didn’t much like, as noted above. But also, PayPal (PYPL) said that as part of the sale (which isn’t expected to be completed until next year) it would share in some of the revenue from Synchrony’s lending activities. So the deal could provide the proverbial win-win with both companies coming out ahead.
(Update: This story was updated on November 17 to correct that the rate on PayPal Credit does not go above 20%).