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Tracing the Impact of the Synchrony Deal on PayPal’s Performance

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Transaction adversely impacted top-line growth

PayPal (PYPL) sold its US consumer lending business to Synchrony Financial (SYF) in a transaction that closed in early July. This transaction reduced PayPal’s exposure to the credit market, particularly consumer credit. PayPal said it received about $6.9 billion from the sale of its consumer lending operation. That transaction affected PayPal’s performance in the third quarter in several ways.

In the first instance, the transaction weakened PayPal’s YoY (year-over-year) revenue growth. Although PayPal reported third-quarter revenue growth of 14.0% YoY, the company noted that its revenue growth would have been 21.0% YoY excluding the impact of the Synchrony deal.

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Free cash flow soars on transactions

In the second instance, the Synchrony deal significantly boosted PayPal’s free cash flow. The company reported free cash flow of $4.4 billion for the third quarter, boosted by proceeds from the sale of its consumer lending business. Without that transaction, PayPal’s free cash flow for the third quarter would have been $772.0 million.

PayPal exits as Square enters

PayPal and its rival Square (SQ) appear to have opposite views of the US consumer credit market. Only a few months after PayPal closed the sale of its US consumer credit business to Synchrony, Square moved in the opposite direction by launching a consumer lending service in the United States under the Square Installments brand.

PayPal, Square, and Amazon (AMZN) generally extend business loans. These loans help their merchant customers add inventory and expand their operations. Amazon has extended more than $3.0 billion in small business loans, while its e-commerce rival eBay (EBAY) works with Square to lend to its sellers.

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