Why PayPal Holdings Wants Out of (and Synchrony Financial Wants In) the Credit Game
Last month, PayPal Holdings Inc (NASDAQ: PYPL) announced it would be selling its U.S. consumer credit portfolio to Synchrony Financial (NYSE: SYF). Under the terms of the deal, Synchrony Financial receives $6.8 billion in receivables and PayPal receives the portfolio's "approximately par" value in cash from Synchrony. As part of the agreement, Synchrony will also become the exclusive issuer of PayPal's U.S. consumer credit financing for the next 10 years. PayPal will share in the revenue generated from credit to help offset the lost revenue from the interest it charged on its loans.
Under terms of the deal, PayPal and Synchrony will share data, leading to what the two companies believe will be "superior" fraud and risk management. PayPal will retain control over marketing, customer acquisition, and the checkout experience, while Synchrony will handle the authorization and processing of the all transactions and legal compliance matters.
Shares of both companies jumped on the news. For PayPal, it removes the vast majority of credit risk from the business, generally meaning that Wall Street will be more likely to assign it a higher valuation. The concern about credit risk isn't without some merit: This past quarter PayPal's net charge-off rate was 6.4%. For Synchrony, the deal plays directly to the company's strengths by offering consumer credit through third-party platforms.
Source: Fool.com