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What Does PayPal’s Loan Sale Mean for Square?

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PayPal sold consumer loans worth $5.8 billion

PayPal (PYPL), a rival of Square (SQ) in payments processing and cash transfer, recently announced that it was selling a large portfolio of its consumer loans to Synchrony Financial (SYF). PayPal struck a deal to sell $5.8 billion worth of US (SPY) consumer loans to Synchrony. The sale of the loans is expected to benefit PayPal in at least two ways. The transaction will free up cash that PayPal sets aside to fund the credit business, thus boosting the company’s financial flexibility. Plus, the sale of the loans will generate proceeds that PayPal can reinvest in higher-return ventures.

PayPal viewed as reducing credit risk

The sale of its loan portfolio has also been viewed as a step by PayPal to reduce risk in its credit business, and this is where the focus turns to Square. Like PayPal and Amazon (AMZN), Square also extends loans to its customers, and this is a business that the company has suggested fits well with its core operation of processing payments for merchants.

But according to analyst Mark Palmer of BTIG, there is risk in Square’s increasing involvement in credit. Speaking on CNBC’s Closing Bell, Palmer stated, “At a time when PayPal is selling its credit portfolio to Synchrony Financial, Square is running into the fire.”

Square sees bright future in credit business

Contrary to Palmer’s view, Square’s management has suggested that the company has a bright future in the credit business. As well as the gain from charging interest on loans, Square has noted that extending loans to its customers is encouraging uptake of its other products and services. Square records its credit-related income under its subscription and services segment, where sales rose 84% year-over-year to $65 million in 3Q17.

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