PayPal announced today it has agreed to sell $5.8 billion in consumer credit receivables to Synchrony Financial, in an expanded relationship between the companies. The deal also includes Synchrony’s acquisition of $1 billion in participation interests in PayPal receivables held by certain investors and a chartered financial institution, the company said.
Following the news, shares of PayPal were up 2 percent and Synchrony Financial shares were up 3 percent in premarket trading, Reuters reports.
PayPal and Synchrony Bank, a subsidiary of Synchrony Financial, have been partners since 2004 to offer PayPal-branded credit cards that let PayPal users shop online and in stores.
As a result of today’s deal, the two companies will expand their partnership by making Synchrony Bank the exclusive issuer of the PayPal Credit online consumer financing program available to PayPal customers in the U.S. for the next 10 years, replacing Comenity.
For PayPal, the deal means it will lose the interest the loans generate, but it will free up billions that it can use to grow its business in other ways – including in areas that could see higher returns.
PayPal didn’t say how much of its profit comes from lending businesses, but did note these loans will generate $1 billion in revenue for 2017, according to The WSJ. Additionally, the two companies agreed to a rev share model as a part of the deal.
“Providing great payments experiences to our customers is at the core of everything we do,” said Dan Schulman, President and CEO of PayPal, in a statement. “Our expanded relationship with Synchrony Financial will free up cash currently used to fund consumer credit receivables for other uses, while accelerating our ability to deliver engaging credit and payments experiences for our customers. We believe this transaction significantly advances our strategic and financial goals.”
Meanwhile, Synchrony benefits by tapping into a source of consumer loans that’s more tied to online shopping – which is increasingly where consumers make large purchases requiring credit. PayPal is significant player both online and mobile, though it’s being challenged more recently by efforts from companies like Apple and Google, through mechanisms like Apple Pay and Android Pay.
PayPal clarified that merchants offering PayPal Credit and consumers who use it will continue to receive the same benefits they do today. PayPal Working Capital will also continue to operate as it does today, and the company will continue to integrate Swift Financial into its business – the company it acquired earlier this year to bolster small business lending.
The acquisition of PayPal’s consumer loans by Synchrony is still subject to regulatory approval, but is expected to close in the third quarter of 2018.
PayPal was advised by Bank of America Merrill Lynch, while Synchrony was advised by Morgan Stanley.