If You’re a PayPal Credit Customer, You Now Owe Someone Else

After nine years of running PayPal Credit, PayPal decides that consumer lending is best handled in the hands of a bank.

Historically, PayPal has spent 40 to 50 percent of annual cash flow to fund its lending business. ERIC PIERMONT/AFP/Getty Images

Online shoppers and Ebay fans are no stranger to PayPal Credit, a lending program that offers buyers six- to 12-month interest-free payment plans to finance impulsive purchases. But the service will soon have a new owner.

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PayPal announced yesterday that it will sell its U.S. consumer credit business to Synchrony Financial, a former lending unit of GE Capital, for $6.8 billion. Synchrony will take over PayPal’s U.S. consumer credit portfolio for the next 10 years.

Nine years after the program’s inception, PayPal decided that consumer lending is too costly and risky a business to pursue. Executives said the massive capital tied in issued loans could be better used in other investments.

“We are not a credit company,” John Rainey, PayPal’s chief financial officer, said in yesterday’s investor call. “The capital-intensive nature of credit [business] cannibalizes other higher-return investment opportunities.”

The spinoff is expected to free up $1 billion annually for PayPal to pursue other investment opportunities. Without the impact of credit cycle swings, PayPal will also likely have a more consistent earnings stream.

“While this is a very good business, this is also a very capital-intensive one,” Rainey said. The U.S. consumer lending business is estimated to bring in $1 billion of revenue in current fiscal year, but historically, PayPal has spent 40 to 50 percent of its annual cash flow to fund the operation.

Consumers won’t feel any immediate impact of PayPal’s spinoff. PayPal will remain the brand of the credit business, and Synchrony will be the issuer of credit and collector of interests for U.S. consumers.

The deal is expected to close in the third quarter of 2018, pending regulatory approval.

If You’re a PayPal Credit Customer, You Now Owe Someone Else