Good morning, ladies and gentlemen, and welcome to PayPal's November 2017 Investor Update conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Gabrielle Rabinovitch, Head of Investor Relations. Please go ahead.
Thank you, Latoya. Good morning, and thank you for joining us. Welcome to PayPal Holdings Investor Conference Call to discuss our U.S. consumer credit business. Joining me today on the call are John Rainey, our Chief Financial Officer, and Mark Britto, Senior Vice President of Global Credit. We're providing a slide presentation to accompany our commentary. This conference call is also being webcast, and both the presentation and call are available through the investor relations section of our website. We will discuss some non-GAAP measures in talking about our company's performance. In addition, management will make forward-looking statements that are based on our current expectations, forecasts, and assumptions, and about risks and uncertainties. These statements include our projected financial results, the anticipated financial impacts and benefits of this transaction, and the timing of the closing of the transaction. Our actual results may differ materially from those discussed on this call.
You can find more information about risks, uncertainties, and other factors that could affect our results in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q, filed with the SEC and available on the investor relations section of our website. You should not rely on any forward-looking statements. All information in this presentation is as of today's date, November 16, 2017. We disclaim any obligation to update the information. With that, let me turn the call over to John.
Thank you, Gabrielle. Good morning, and thank you for joining us on the call. I'm pleased to be able to announce today that PayPal has signed a new long-term strategic partnership with Synchrony Financial. Joining me on the call is PayPal Senior Vice President of Global Credit, Mark Britto. Mark has been a key architect in the work that has led to today's announcement. Mark and I are going to spend some time walking you through the key aspects of the expanded program, and then we will open it up for questions. The partnership we're announcing today is the culmination of a nearly year-long competitive process that will result in tremendous benefits for both PayPal and Synchrony.
PayPal and Synchrony will extend our existing co-branded consumer credit card program agreement, Synchrony will also become the exclusive issuer of the PayPal Credit online consumer financing program in the U.S. for the next 10 years. As part of this partnership, Synchrony will acquire the assets of PayPal's U.S. consumer credit receivables portfolio. First, I want to start with the rationale for this expanded relationship. You can follow along on the third slide of the presentation posted on our website this morning. As we previously communicated, credit is an important part of our business. It increases consumer engagement, attracts merchants to our network, and complements the holistic suite of payment offerings on our platform. We are not a credit company. First, the capital-intensive nature of credit cannibalizes other higher-returning opportunities for capital allocation.
Second, we want a consistent, durable earning stream that is not subject to swings through a credit cycle. For those two reasons, this partnership proves to be the best way to accelerate the growth in credit offerings to customers while appreciably broadening our opportunities to deploy our cash flow going forward. Turning to page four, the agreement we are announcing today accomplishes every single objective that we hope to achieve. By partnering with Synchrony, we can use their balance sheet and capabilities to grow the U.S. consumer credit offering to a much greater extent than we can on our own. We expect to receive more than $6 billion of cash upon the sale of the portfolio. This cash will be allocated toward alternatives that we expect will generate higher returns for our business. We will also reduce our credit earnings exposure, de-risking our business.
At the same time, through a profit-sharing structure, we still participate in credit earnings, minimizing the dilutive effect. Lastly, very importantly, we expect to free up well over $1 billion a year going forward for other capital allocation without compromising our earnings growth. Our expectations for operating income next year have not changed. Even with this deal, we still expect approximately 20% operating income growth in 2018, consistent with the guidance provided on our last earnings call. All of these assumptions do not reflect the impact of putting this incremental $6 billion to work. Now I'm going to turn it over to Mark to discuss the key aspects of the partnership, after which I will discuss the financials in more detail.
Thanks, John. It's great to be speaking with all of you this morning. On slide five, I'm going to take a step back to provide some valuable context on the importance of credit for PayPal and our customers. At PayPal, providing access to credit is an important part of our mission to democratize financial services. We have the unique opportunity to harness the power of PayPal's extensive data capabilities, consumer and merchant relationships, and technology prowess to offer simple, relevant lending solutions to help advance the financial health of our customers
PayPal Credit products leverage both sides of our platform and strengthen both our consumer and merchant value propositions. Credit is a core capability that differentiates PayPal from rival payment processors and drives greater engagement. Increasingly, we have looked for opportunities to diversify our funding sources in a manner that is less balance sheet intensive. An asset-light strategy is what ensures we can invest our resources in more ways that benefit our customers, and if those resources were used to fund credit receivables. The announcement we made today represents a significant milestone in this strategy. By way of background, the company has been working on this transaction for the better part of 2017. We ran an exhaustive competitive process that involved a group of high-quality participants.
The transaction we've announced today accomplishes our key goals, including moving assets off the balance sheet, maintaining the deep integration of credit offerings in our broader business, continuing to earn economics on the performance of the portfolio, and importantly, finding the right partner who will be aligned with our goals for portfolio growth and profitability. We are pleased to be working with the outstanding management team at Synchrony, and we look forward to closing this transaction in Q3 of 2018. There are multiple components to the extended relationship that we have structured. For competitive reasons today, we'll be speaking primarily to the financial value of the transaction. On slide six, we have laid out the key attributes of our extended relationship with Synchrony. This transaction, including the broadening of our agreement with Synchrony to include the U.S. PayPal Credit program, is an incredible outcome for our consumers and our merchants.
We believe Synchrony's expertise, product capabilities, and data will help further enhance our consumer and merchant value proposition by allowing PayPal to offer innovative consumer credit experiences to our U.S. customers without leveraging PayPal's balance sheet to fund consumer credit receivables. Since 2004, we've partnered with Synchrony for our U.S. consumer credit card program. It provides PayPal-branded consumer credit card options, allowing cardholders to shop online and in stores. That long-standing 13-year relationship has reinforced that Synchrony is a natural fit for us, given their knowledge of our business and history of delivering innovative products for PayPal customers. Together, we can deliver exceptional consumer and merchant payment experiences, leveraging and maximizing the strengths that each partner brings to the table. This is an exciting time in financial technology, and no one is better positioned to deliver innovative financial services and products to both merchants and consumers than PayPal.
Synchrony is an industry leader with extensive expertise in credit operations and has a strong balance sheet. This partnership is a very powerful combination and will allow PayPal to significantly grow our U.S. consumer credit offerings in the coming years. Finally, on slide seven, I want to discuss in more detail the ongoing roles of both PayPal and Synchrony. When you look at the key capabilities that Synchrony and PayPal bring to the table, it's clear how strong this expanded partnership will be. While PayPal will continue to drive consumer experiences, marketing, and risk modeling, Synchrony will take ownership of transaction authorization, fraud management, and payment processing. We're pleased to have come to an agreement that benefits both parties and offers greater value to PayPal customers than what we could have offered on our own. For example, one of PayPal's competitive advantages is our risk architecture and data science capability.
We combine PayPal-specific sources of data with advanced modeling techniques to enable powerful risk management across the full range of the customer life cycle. We expect to continue to enhance and leverage this capability, working with Synchrony to co-develop risk models and decision strategies that will allow us to say yes to more consumers and create new, more personalized credit experiences. In addition, having Synchrony as our single issuer for all U.S. consumer products will allow us to explore multi-product concepts and offer a full suite of credit products to meet the ever-changing needs of the PayPal customer. There's no limit to the credit product opportunities for consumers. We're also very excited about what this will mean for our merchant community. We've always focused on tailoring products, pricing, and promotions to meet the unique needs of our very large and diverse merchant community.
Synchrony has decades of experience working with an equally diverse retail merchant population, we'll only strengthen our ability to service merchants together. We firmly believe that by marrying Synchrony's core credit competencies and balance sheet with our data and risk platform and trusted brand as a leader in digital and mobile payment experiences, we can create superior products and offerings for our consumers and merchants. With that, I will turn it back over to John to provide more detail on our U.S. consumer credit business and the financial impact of this transaction.
Thank you, Mark. Picking up on slide eight in the presentation materials, I want to spend a moment orienting you on the U.S. consumer credit portfolio. We have approximately $6.9 billion of total credit receivables on our balance sheet today. This includes U.S. consumer credit receivables of approximately $5.8 billion, merchant credit receivables of roughly $900 million, and approximately $200 million of international consumer receivables. This transaction applies only to U.S. consumer credit. U.S. consumer credit currently represents approximately 2% of our TPV today and is estimated to generate approximately $1 billion of revenue this year. While this is a very good business, it's also a very capital-intensive one, as we have historically used 40%-50% of our free cash flow to fund it. Turning to slide nine. We expect to close this transaction in the third quarter of 2018.
At that time, we expect to receive more than $6 billion in proceeds, we will free up over $1 billion in cash every year going forward. This will allow us to allocate capital to higher-returning investments. It will allow us to be more aggressive in returning cash to shareholders and invest more in both organic and inorganic growth. It's important to note that our bank in Luxembourg purchases our U.S. consumer credit receivables, the proceeds from this transaction will be international cash. Let me be very clear, we are going to put this capital to work to increase shareholder value. We have plans in place that contemplate several scenarios as it relates to tax reform, as well as other strategic initiatives. We'll provide more information when it's appropriate.
In the interim, we will preserve flexibility as we evaluate moving to a more optimal capital structure and continue to explore the strategic landscape for M&A. The transaction by itself is only mildly dilutive, allowing us to maintain our previous guidance of 20% growth in operating income. Importantly, this estimate of dilution is before allocating any of the proceeds or reinvesting any of the freed-up capital. I want to highlight a very important point on page 10 in the presentation. There are three charts on this page, all representing revenue from 2016 to 2018. The first chart represents our revenue projections prior to the completion of this transaction with our prior 2017 and 2018 guidance. The second chart depicts the effect on revenue from this transaction. U.S. consumer credit revenue for 2017 is estimated to be approximately $1 billion.
As this business is transitioned to Synchrony next year and replaced with a profit-sharing structure, we expect a one-time reduction in our year-over-year revenue growth of approximately three and a half percentage points, taking our revenue growth from the previously guided 20% to 16.5%. Finally, most importantly, the chart on the far right adjusts our revenue on a pro forma basis as if the program agreement went into effect at the beginning of 2016. As you can see, on a comparable basis, our revenue growth remains at the same high level and is, in fact, higher because we are working off of a lower base. It's also important to note that the growth of our free cash flow, again, on a pro forma basis, will continue in line with revenue growth.
While we are announcing the sale of the portfolio today, the transaction is not expected to close until the third quarter of 2018. There is an important accounting change to call out. Previously, our receivables were accounted for as held for investment. This presentation requires that we record the receivables on our balance sheet net of reserves. Further, the net originations were accounted for within the investing section of our cash flow statement. With this transaction, the U.S. consumer credit receivables are now accounted for as held for sale. On slide 11, I'll walk you through the implications of this change. Starting on the left side of the page, there is a one-time impact from the transaction that we will record this quarter. We'll release the reserve on our balance sheet for future losses of principal and interest.
This will result in a one-time benefit of approximately $45 million to revenue and approximately $300 million of operating income. These items are GAAP-only benefits and will increase GAAP EPS by approximately $0.15 to $0.20 with no change to our estimate of non-GAAP EPS. Moving to the right side of the page, I want to highlight the ongoing impact from the change in accounting that will persist until the transaction closes. On the income statement, we will no longer be required to record reserves for future principal losses, which were accounted for in our transaction and loan loss line, and interest losses, which were accounted for as contra revenue. These items will be offset by an equal amount in our other operating expenses. The net effect of these items will benefit revenue by approximately $25 million and have a negligible impact to operating income.
In addition, I'd like to call your attention to a change to the presentation of our statement of cash flows that begins this month and will continue until the transaction closes in the third quarter of 2018. All new originations, net of repayments, will be characterized as available for sale and included in cash flow from operations, affecting the presentation of our free cash flow during this interim period. At the same time, repayments related to loans originated prior to reclassification as held for sale will be presented as cash flows from investing activities. At the close of the transaction in Q3 2018, proceeds from the sale of the U.S. consumer credit portfolio will be allocated between cash flows from operations and cash flows from investing based on the presentation of the originated loans.
We expect this accounting presentation to result in lower free cash flow in the fourth quarter of 2017, as well as the first half of 2018, by approximately $1.5 billion in Q4 and approximately $2.3 billion in the first half of 2018. Commensurate with this impact, we expect free cash flow in Q3 2018 to be offset by an equal benefit of approximately $3.8 billion when the transaction closes. I want to discuss our guidance on page 12 for the fourth quarter in 2018. For the fourth quarter, we expect our non-GAAP revenues to be in the range of $3.595 billion-$3.655 billion. We expect GAAP EPS to be between $0.52 and $0.59, with no change to our non-GAAP EPS guidance. For 2018, we expect revenues to grow approximately 16.5%, with no change to our non-GAAP operating income growth estimate of 20%.
We previously stated that we expected to see GAAP operating margins grow at least in line with non-GAAP operating margins for 2018. This is expected to change only as a result of the one-time GAAP items I highlighted previously, and our core business margin growth outlook remains unchanged. In closing, we are exceptionally pleased with this transaction and the extension of the relationship with Synchrony. We will continue to provide great consumer credit options for our customers. We expect to receive more than $6 billion of cash proceeds upon closing the transaction, and expect to have in excess of $1 billion per year of additional cash for capital allocation. We will de-risk our earnings profile by reducing our exposure to credit cyclicality.
I plan to do all of this while maintaining the revenue, earnings, and free cash flow growth trajectory in our business after adjusting for the impact of this transaction in 2018. I would now like to turn it over to the operator for questions. Operator, please go ahead.
Thank you. If you have a question at this time, please press the star, then one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We ask that you please limit yourself to one question and to return to the queue for any follow-ups. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. The first question is from Bryan Keane of Deutsche Bank. Your line is open.
Hi. Good morning, guys. Congratulations on finally getting this deal done. Looks exciting for both sides. I just want to be clear here. Just trying to understand the EPS dilution from the consumer credit sale. Does the profit-sharing agreement with Synchrony offset that dilution? It sounds like it should. Just trying to figure out how that agreement might work to offset the credit piece, the income piece that you're receiving from the portfolio. Thanks.
Sure. Good morning, Bryan. This is John. By Synchrony going forward, funding the capital to originate these loans, as well as purchasing the book from us, they're obviously going to share in the profits of that. As we move forward under a profit-sharing arrangement, the economics that we will receive from this business will obviously be less than what it is today. Thus, the dilutive impact of that. We were able to structure this in a way that we have pretty attractive profit-sharing economics as part of this transaction. At the same point in time, we're seeing acceleration in other parts of our business that gives us comfort that we can maintain the original guidance that we gave of 20% operating income growth going into next year.
Okay. Just quickly, is there any change in the midterm outlook on growth rates and guidance that you guys have given previously?
There's nothing about this transaction that would cause us to change the midterm guidance that we provided. In fact, if you look at what's happening with the core revenue and free cash flow in our business, we're pretty pleased with the progress we've made this year and expect that to continue.
Okay. Thanks so much.
Thank you. The next question is from Tien-Tsin Huang of J.P. Morgan. Your line is now open.
I hope you can hear me okay. Congrats on getting this done. I guess I wanted to ask, John, just will there be any sort of credit restrictions that might alter the growth rate and originations either due to the cycle or due to performance? Ultimately, I'm just trying to understand the difference in risk appetite that Synchrony might take on relative to what you've been doing up until now.
Sure, Tien-Tsin. Good morning.
Morning.
One aspect of this partnership is that we will combine capabilities that PayPal has to offer with what Synchrony has to offer, and we truly believe that that's additive. We will jointly evaluate sort of the risk profile going forward. I think an important element of this, as you allude to restrictions, is this actually allows us to grow this portfolio much greater than we could if it were simply on our balance sheet. As we look forward in our future plans and we see the demand for credit The benefits that it provides to our consumers, we're limited with what we can do because of the amount of free cash flow that we were directing towards this each year, as well as the overall size of the assets on our balance sheet.
By partnering with Synchrony, we can actually use their balance sheet and grow this portfolio much more than what we could if we kept it on our balance sheet. I would say different to the tone of the question is, we actually think that we can expand this much more and don't plan to restrict it any.
Right. To spin it back, you're saying the combination of you and Synchrony together, the risk appetite or the ability to underwrite more could go up, which would in turn enhance your potential growth from this channel.
I think that is correct, given the capabilities that we both bring to the table. That said, our interests are aligned from a profit-sharing standpoint, and to the extent that we are faced with a credit cycle, we're both interested in managing through that credit cycle in the best fashion possible.
Right. No, that makes sense. No, it's great. I appreciate it.
Thank you. The next question is from Darrin Peller of Barclays. Your line is open.
Thanks, guys, and congrats. I just want to start off with a question on the capital structure intentions going forward, and really how this new flexibility should impact your plans around maybe capital return versus deals. John, you guys have no leverage still, should we think about this being more international cash now taking on some leverage in the U.S.? Then especially with the free cash flow generation not needing to be tied up with capital requirements, again, you have that operating cash flow coming out now at a pretty high level. Just a little more color on your intentions here. Thanks.
Sure, Darrin. A lot to that question. Allow me to walk you through our thinking on this. With the $6 billion in proceeds that we expect to receive from this transaction and the ongoing in excess of $1 billion a year increase in our cash flow, this gives us a tremendous opportunity to allocate capital to increase shareholder value. Our priorities for that have not changed. I would put them in two categories. The first category is investing in high-return opportunities to grow our business. That can include both organic and inorganic or M&A, and we'll continue to go down that path. At the same point in time, given the cash generation of the business and the size of this transaction, we can return more cash to shareholders, and that's very important to us as well.
With respect to that, though, there are a couple near-term items that provide some uncertainty, and specifically, I'm referring to tax reform. As you know, Darrin, this will be international cash. As we look at addressing both of those alternatives, an option, should we not get tax reform, is to add some debt to the balance sheet, and that's certainly something that we're exploring, but we want to be pretty measured here. Certainly we could go out very quickly and, just for example, return 100% of this to shareholders and easily manage the dilution and make this a very accretive transaction in the near term. That might be a decision that is at the expense of other higher-returning alternatives that could generate better returns over the long period of time.
I can appreciate the desire for more specificity on this, there's a little bit of uncertainty right now in the landscape that I think the responsible and disciplined thing to do is be a little bit measured as we see the events unfold around tax reform, and then we can be a little bit more specific with our intentions on how we allocate this going forward.
Okay. All right. I guess that's understandable. We'll wait for that. Thanks. Just really quick follow-up on the strategic alliance now that you have with Synchrony. Obviously, this allows for more balance sheet power to grow the book. In terms of the relationship, do you guys have any strategic incremental advances that should allow the business to even operate at a better level or a different level, allow new products? Is there anything more to this than just the actual loans moving from one balance sheet to another? Thanks again, guys.
This is Mark. Absolutely. Synchrony has a broad range of products that they bring to bear that go beyond those PayPal historically has had access to. As a result, we will be in a position to offer consumers more financing options. By consolidating with a single provider, we can use advanced modeling techniques to deliver the most relevant product to the consumer at the most appropriate time. Furthermore, by not having to devote resources to back-end activities, we are in a position to refocus our energies on developing great customer experiences.
Got it.
Thank you.
All right. Thanks, guys. Congrats.
The next question is from James Faucette of Morgan Stanley. Your line is open.
Hi. I wanted to just follow up on that question, and I'm wondering if you can maybe give us some examples of how new products, et cetera, if they can help drive, and through the partnership with Synchrony, drive towards your goal of increased frequency of use of PayPal generally among your customers. It seems like there should be some opportunities to do that, but I want to make sure that that's the case in how you're thinking about using this to increase the leverage in other parts of the business.
We absolutely believe that that is the case. That said, we're not talking about that now. We'll have more to say about that closer to the close of the transaction.
When you look at the hurdles of closing the transactions, et cetera, are there risks that we should be aware of, whether it be changes in the overall economy or sharp changes in the credit portfolio that could happen between now and then that could potentially result in changes to the terms of the deal?
No. I would describe this as a very standard transaction with customary closing conditions, and it's a true sale, so I don't believe there's any risk of that.
All right. That's great. Thank you.
Thank you, James.
Thank you. The next question is from Heath Terry of Goldman Sachs. Your line is open.
Great. Thanks. Just maybe to follow up a little bit on that last question, can you give us a sense of just practically what you've been limited in doing to grow this part of the business over the past few years that changes? Is it a function of credit quality? Is it a function of product? Is it a function of merchant relationships or breadth? Just wondering where you ran into limitations in the past and what those limitations were that you won't see going forward. Then to the extent that we're looking out at the deal longer term over this 10-year period, can you give us a better sense of sort of what the economics of a loan or of a credit issuance looks like for you and for Synchrony once we start getting into the more operational aspects of this?
Sure, Heath. Any limitations have a lot more to do with the financial architecture of our company than what we see on the consumer side. For example, we've often talked about the many benefits that consumer credit provides to our platform. To be very clear, with a two-sided network with 17 million merchants on one side, those merchants want us to offer consumer credit. They recognize that for them, it provides higher conversion. You see more engagement on our platform. There are many benefits to that.
However, when we look at the sort of proportion of our earnings and revenue that come from credit, the concern that we have is that probably in the past would have presented a situation for us where maybe those earnings aren't quite as durable, meaning that if someone were to ascribe a PE to that it's maybe not the same PE ratio that one would to the overall business. This gives us an opportunity to turn that notion on its head, where we can continue to grow credit, but not be so reliant on the earnings of that. This transaction alone will cut the percentage of earnings and revenue that we get from credit in half. I think that's a very good thing for us.
As we move forward, though, and to the second part of your question, this is, I think, a fairly standard type of agreement that is a profit-sharing structure, where when we'll look at the return metrics on this portfolio and above a certain threshold, we will participate in a certain percentage above that. I think pretty standard, and not unlike what we previously had with Synchrony with our earlier agreement.
Great. Thanks, John.
You bet, Heath.
Thank you. The next question is from Georgios Mihalos of Cowen. Your line is open.
Great. Good morning, guys. John, I was hoping you can flesh out a little bit more, provide some more color on your ability to drive the 20% Op income growth, given that you talked about resetting the revenue down three and a half points for the sale. Just where is that better performance on the operating line coming from? Then longer term, as we think about the structure of the deal, will this not be accretive to the overall margin for PayPal, given that you're basically just going to be booking your portion of the revenue-sharing arrangement? Thank you.
Yeah. Sure, George. Let me take the second one first. You are absolutely correct. This will drive improved margins in our business simply by the fact that we're reducing the revenue denominator, and this is a profit-sharing type of arrangement. It'll also increase our transaction margin. To the first part of the question, in terms of the drivers for maintaining the 20% operating income growth, there's two factors to consider there. The first is, this is a transaction that we expect to close, we said in the third quarter next year. If you assume a July 1st close, the effect of this transaction is only for half a year in the first year. That said, everything I said about 2018, I believe applies to each year thereafter, and that there's pretty minimal dilution.
It's not as if there's another shoe to drop in a later year where now this is more impactful. That's the first thing. The second thing is absolutely what we are seeing in our business, and we continue to be very pleased with the core performance across most regions in all aspects of our platform. 20% operating income is a general range we set approximately, and this certainly falls into that category. To be clear, we could go out and absolutely solve for that and make sure that this is accretive in the first year, that may not be the very best thing for PayPal long term.
As I said in response to a previous question, we're going to be a little measured here with the approach to allocating this capital, not solving for it being an accretive transaction in the first or second quarter. That may be what we do, we want to get an assessment of the landscape as that unfolds and look at some of the strategic opportunities that we have out there as well.
Thank you.
Thank you. The next question is from Sanjay Sakhrani of KBW. Your line is open.
Thanks. Good morning, congrats. Just want to make sure. The economic share profile of this deal throughout the tenure is the same, or does it sequence in any way, like step down or step up over time?
That's a good question, Sanjay. No, it's relatively similar throughout the entire ten-year timeframe. It's not as if the, for example, the profit sharing or the return threshold or the percentage that we participate in profits changes from one year to the next. That's not the case. There's nothing unique about that.
This deal is closing in the third quarter. In the interim period, are you guys still originating and retaining the loans, or is Synchrony doing that?
No, we're doing that on our own behalf until close.
Okay. All right, great. One final question. To the operating efficiency question, are there any cost reductions that you guys might see as a result of the sale?
We didn't do this transaction for cost reductions. Certainly, we have infrastructure and support costs for that today. At the same point in time, we will support this agreement for a period of time after the transaction. We're also growing our merchant credit product. Some of those costs will transition into that. I would expect, like any cost area, over time, we might expect to see some cost savings, but that's not a near-term driver of the purpose of this transaction.
Thank you very much.
Thank you. The next question is from Bill Carcache of Nomura. Your line is open.
Thanks. Good morning. John, I wanted to follow up on some of your earlier comments. I completely get the ability to leverage Synchrony's balance sheet and expand the availability of the product offering to more customers, and that certainly can drive meaningful growth. I was just trying to understand how the deal could impact the availability of PayPal Credit to, I guess, some of your lower FICO customers. It seems like PayPal's credit box has traditionally been a little bit wider versus Synchrony's. Just looking at some of the disclosures, roughly 50% of your customers have FICO scores below 680. It's like a 50/50 mix versus at Synchrony, it's only about 30% of customers.
I was wondering how going forward, how the agreement or whether your agreement does anything to try to ensure that some of your customers who would have had access to PayPal Credit in the past, maybe some of those lower FICO customers will maintain access to the product going forward.
Yeah, Bill. One of the benefits of partnering with Synchrony on this agreement is the 13 or 14-year relationship that we've had with them. We know each other pretty well, and they know our data pretty well. I think that allowed us to get to this point in the transaction. We will jointly participate in the underwriting, but they will have the ultimate say around that. We believe that with their capabilities around this, their balance sheet, as well as what we can complement, what we can offer them in terms of some of the data that we provide on our customers, we can continue to underwrite to the type of credit customers that we have today. Obviously, that changes from period to period based upon what we're seeing in macroeconomic impact, as well as the fact if we're going through any type of credit cycle.
We believe that you shouldn't necessarily assume that this portfolio is going to take a dramatically different shape simply because Synchrony is now originating and doing the underwriting.
Got it. That's very helpful. Thanks, John. Maybe just as a follow-up on that point. Is it reasonable to expect that the kind of economic sharing would capture the performance of whether it's lower FICO customers or higher FICO customers, the overall profitability of the program is something where you guys are locking arms and going after the opportunity together and have aligned your interests collectively, whether it's lower FICO or higher FICO customers, and it's the overall profitability of the program that you're both incented to drive?
I think that's a fair characterization, definitely. I would add that for Synchrony, while I don't want to speak for them, I can probably share that one of the attractive aspects of this is you have a portfolio of very digitally engaged consumers. This is a consumer base that certainly is active in e-commerce, and this is a very important leg of growth, I think for issuers today. That was something that we heard loud and clear across all issuers when we did the RFP. This is something that is attractive for them as well.
That's great. Thank you very much for taking my questions.
You bet. Good to speak with you.
Thank you. We have time for one last question from Chris Brendler of Buckingham Research. Your line is open.
Hi. Thanks. Good morning. John, one thing I was a little bit surprised about was, I think that slide deck mentioned that there was a sale of the receivables approximate at par, and I would've thought there'd been a more meaningful gain. Can you just comment on that? My thinking is maybe the gain has been reduced by the sharing relationship going forward.
I wouldn't necessarily suggest that. It is approximately at par. I don't know that there's a whole lot more to add to that. It's certainly a market-based arm's length transaction, and both sides are comfortable with where we ended up.
Okay. Unrelated question, you talked about the freeing up of free cash flow and the benefits to the balance sheet and free cash flow from doing this transaction. Does this increase your appetite for merchant financing given the lack of the drag from consumer?
That's a great question. I would characterize it slightly differently. It doesn't necessarily increase our appetite. Our appetite has always been pretty large there. It increases our ability though, for sure. It's probably worth speaking just a moment on that because we've recently purchased Swift Financial, added that to our merchant credit platform. This is something that, again, with our data and technology, this is something we're pretty good at. It's certainly a core competency, but it's a much smaller part of the receivables balance today. So we can certainly put our foot on the accelerator there a little bit more now that we are not originating loans with our own balance sheet.
To be very clear, if merchant capital, merchant credit were to grow to an extent that we found ourselves in a similar situation as we do with consumer today, where it's a draw on free cash flow or it becomes too large a part of our balance sheet, we can explore a more asset-light approach with merchant capital as well. I think that we are many years down the road from ever getting to that point, if you look at the size of the portfolio, but it doesn't preclude us doing that in the future.
Okay.
All right, well-
Thanks so much.
Go ahead. You bet.
I was gonna ask one more question if I could, just because, just trying to reconcile the revenue hit. This is obviously a half year at 3.5%, so it's a full year of lack of consumer. I was wondering if this merchant financing business, is that a potential offset? If you could give any sort of sizing around the sharing agreement, how much of an offset that is to that 3.5% headwind, that'd be really helpful. Thanks.
Yeah. The 3.5% change in revenue only pertains to U.S. consumer credit, so that is not offset by any increase in merchant credit. That said, whether it's merchant credit or just core PayPal, we do expect to have growth there that mutes some of the near-term one-time pressure that we would see around this. I don't really want to be more specific about the profit-sharing levels or any other aspect of this agreement. Like any deal like this, that's best kept private.
Great. Thank you so much.
You bet. Well, thank you for that last question. Thank all of you for joining us this morning. We appreciate your time. We look forward to speaking with you soon and wish you and your families a wonderful Thanksgiving holiday. Thanks.
Thank you. This concludes today's Q&A session. Ladies and gentlemen, thank you for participating in today's conference call. This concludes the program. You may now disconnect. Everyone have a great day.