Why Synchrony and PayPal are joining forces

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PayPal Holdings didn’t have to look very far to find a dance partner.

The San Jose, Calif.-based payments giant spent most of 2017 looking to sell off its consumer loan portfolio to reduce its exposure to the whims of the credit cycle. In the end, PayPal chose to partner with Synchrony Financial, which has been issuing PayPal-branded credit cards for the past 13 years.

Under a deal announced Thursday, Synchrony, of Stamford, Conn., will acquire $6.8 billion in loan receivables from PayPal, and will become the exclusive issuer of PayPal Credit in the U.S. for the next 10 years. PayPal Credit is frequently used by shoppers who have maxed out their credit cards to finance big-ticket online purchases.

The two companies also agreed to extend their longstanding credit card partnership.

PayPal said that it expects to receive more than $6 billion in cash when the sale is completed. The transaction is expected to close in the third quarter of 2018.

Here is a look at what the deal means for both companies.


PayPal entered the consumer lending business in 2008, when it acquired Bill Me Later, which offered financing for e-commerce purchases.

That product, later rebranded as PayPal Credit, eventually accounted for roughly 6% to 7% of PayPal’s revenue and a similar percentage of its profits. And those numbers likely understated the product’s value to PayPal, since having a credit option almost certainly generated more spending on the company’s payments network.

But early this year, PayPal announced that it was exploring ways to reduce its credit exposure. The company made clear that it would continue offering PayPal Credit to consumers, but indicated that it was seeking out a partner that would shoulder the risk of the loans going bad.

The deal announced Thursday achieves that objective. Stock investors embraced the announcement, as shares in PayPal rose by nearly 6%.

PayPal is not principally in the credit risk business, and the company has not operated PayPal Credit through a full economic cycle, noted Lisa Ellis, an analyst at Bernstein Research.

During a conference call Thursday, PayPal executives said they want a consistent earnings stream that is not subject to swings through the credit cycle. Operating a consumer lending business prevented PayPal from using its capital in ways that will yield higher returns, they indicated.

The deal will also foster higher loan volumes, according to PayPal Chief Financial Officer John Rainey.

“By partnering with Synchrony, we can use their balance sheet and capabilities to grow the U.S. consumer credit offering to a much greater extent than we can on our own,” he said during the conference call.

PayPal said that as a result of the deal, the company expects a 3.5-percentage-point reduction in its year-over-year revenue growth, from 20% to 16.5%.


Synchrony, which specializes in credit cards that are cobranded with retailers, has been trying to keep pace with the shift in consumers’ shopping habits toward digital channels.

The PayPal deal helps Synchrony in this regard. Once the deal closes, PayPal will become one of Synchrony’s top five retail partners, according to analysts at Credit Suisse.

Synchrony CEO Margaret Keane said that the deal will allow Synchrony to grow in the digital realm. “We’re traditionally a retail platform,” she said in an interview.

The PayPal agreement may also add to the credit risk in Synchrony’s portfolio. At the end of 2016, borrowers with credit scores below 680 owed 49% of PayPal Credit’s loan receivables, according to a report from analysts at Nomura Instinet. The comparable figure at Synchrony was 27%.

Analysts at Fitch Ratings said Thursday that they expect modest deterioration in the quality of Synchrony’s assets.

But John Hecht, an analyst at Jefferies, said that PayPal Credit has a higher percentage of customers with strong credit scores than Synchrony does. “So it should be about the same loss content,” he said.

Under the deal, the two companies plan to collaborate on underwriting PayPal Credit loans, though Synchrony will have the final word.

Synchrony Chief Financial Officer Brian Doubles said that the deal offered an attractive trade-off of risk versus returns. “This won’t materially impact the overall credit quality of our portfolio,” he said.

The PayPal deal will reduce Synchrony’s capital levels, but analysts said that the firm has been overcapitalized. Shares in Synchrony rose by 2.6% on Thursday.

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M&A Consumer lending Credit cards E-Commerce Margaret Keane PayPal Synchrony