What is PayPal so eager to do while selling assets and vying for a banking license?

Author: Sleepy.txt

PayPal is going to open a bank.

On December 15th, the global payment giant with 430 million active users officially submitted an application to the Federal Deposit Insurance Corporation (FDIC) and the Utah Department of Financial Institutions, planning to establish an Industrial Bank (ILC) called "PayPal Bank".

However, just three months earlier, on September 24th, PayPal announced a major deal, selling its $7 billion "buy now, pay later" loan assets to asset management company Blue Owl.

However, just three months earlier, on September 24th, PayPal announced a major deal, selling its $7 billion "buy now, pay later" loan assets to asset management company Blue Owl.

During the conference call at the time, CFO Jamie Miller confidently emphasized to Wall Street that PayPal's strategy was to "maintain a light balance sheet," freeing up capital and improving efficiency. These two things are contradictory: pursuing a "light" balance sheet while simultaneously applying for a banking license. It's important to understand that banking is one of the most "heavy" businesses in the world, requiring huge deposits, subjecting to the strictest regulations, and bearing the risks of deposits and loans. Behind this contradictory decision must lie a compromise forced by some urgent reason. This was not a routine business expansion, but rather a beachhead landing against regulatory red lines. PayPal's official reason for opening a bank is "to provide lower-cost loans to small businesses," but this reason doesn't hold up to scrutiny. Data shows that since 2013, PayPal has cumulatively issued over $30 billion in loans to 420,000 small businesses worldwide. In other words, in the 12 years without a banking license, PayPal has still managed to make its lending business thrive. Given this, why apply for a banking license at this particular time? To answer this question, we must first understand: who actually issued those $30 billion in loans?

In issuing loans, PayPal is just a "sub-landlord"

PayPal's official press releases present impressive lending figures, but a core fact is often obscured. For every single one of these $30 billion loans, the actual lender is not PayPal, but a bank located in Salt Lake City, Utah—WebBank.

Most people have probably never heard of WebBank. This bank is extremely secretive; it doesn't have consumer-facing branches, doesn't advertise, and even its website is very minimal. But in the hidden corners of American fintech, it is an unavoidable behemoth.

PayPal's Working Capital and Business Loans, Affirm's installment payments, and Upgrade's personal loan platform all rely on WebBank as the lender. This involves a business model called "Banking as a Service (BaaS): PayPal handles customer acquisition, risk control, and user experience, while WebBank is only responsible for one thing—issuing licenses. To put it more simply, PayPal is merely a "sub-landlord" in this business; the actual ownership is in WebBank's hands. For a tech company like PayPal, this was once a perfect solution. Applying for a banking license is too difficult, too slow, and too expensive; applying for lending licenses in each of the 50 states in the US is an extremely cumbersome administrative nightmare. Renting a WebBank license is like having a VIP fast track. However, the biggest risk in running a business like this is that the landlord might not renew the lease at any time, or even sell or demolish the property. In April 2024, a black swan event occurred that sent chills down the spines of all US fintech companies. A BaaS intermediary company called Synapse suddenly filed for bankruptcy, directly resulting in the freezing of $265 million in funds belonging to over 100,000 users, with $96 million even disappearing without a trace; some people lost their life savings. This disaster made everyone realize that the "subleasing" model actually has huge loopholes. Once a problem occurs in any link, the user trust you've painstakingly built up can collapse overnight. As a result, regulatory agencies began to rigorously scrutinize the BaaS model, and several banks were fined and had their business restricted due to BaaS compliance issues. For PayPal, although it partnered with WebBank instead of Synapse, the risk logic was the same. If WebBank ran into problems, PayPal's lending business would be paralyzed; if WebBank adjusted the terms of cooperation, PayPal had no bargaining power; if regulators required WebBank to tighten the cooperation, PayPal could only passively accept it. This is the dilemma of the "subleasing" model: you're working hard to do business, but your lifeline is still in the hands of others. Besides, what truly convinced management to go it alone was another, more blatant temptation: the exorbitant profits of the high-interest-rate era. In the past decade of zero interest rates, banking wasn't exactly a lucrative business because the interest rate spread between deposits and loans was too thin. But today, the situation is completely different. Even though the Federal Reserve has begun cutting interest rates, the benchmark interest rate in the United States remains at a historically high level of around 4.5%. This means that deposits themselves are a gold mine. Look at PayPal's current predicament: it has a massive pool of funds from 430 million active users, all sitting in their PayPal accounts, and then PayPal has to deposit this money with partner banks. These partner banks use this low-cost money to buy 5% yield US Treasury bonds or issue higher-interest loans, making a fortune, while PayPal only gets a tiny scrap. If PayPal obtains its own banking license, it can directly turn the idle funds of its 430 million users into its own low-cost deposits, then buy government bonds on one hand and lend money on the other, keeping all the interest rate spreads for itself. During this period of high interest rates, this represents a profit difference of billions of dollars. However, if the goal was simply to get rid of WebBank, PayPal should have done so much earlier. Why wait until 2025? This brings us to another, more pressing and potentially fatal anxiety deep within PayPal's heart: stablecoins.

Issuing Stablecoins: PayPal Still a "Landlord"

If being a "landlord" in the lending business only meant PayPal earned less and had more worries, then in the stablecoin arena, this dependency is evolving into a real survival crisis.

In 2025, PayPal's stablecoin PYUSD experienced explosive growth, with its market value tripling in three months to soar to $3.8 billion. Even YouTube announced in December that it would integrate PYUSD payments.

Behind these exciting sales reports, however, lies a fact that PayPal, like many others, won't emphasize in its press releases: PYUSD wasn't issued by PayPal itself, but rather through a partnership with New York-based Paxos. This is another familiar "white-label" story; PayPal is merely the brand licensor, much like Nike doesn't manufacture its own shoes but licenses its logo to contract manufacturers. In the past, this resembled a division of labor: PayPal held the product and traffic, while Paxos handled compliance and issuance—each doing their own thing. But on December 12, 2025, this division of labor began to change. The Office of the Comptroller of the Currency (OCC) has granted conditional approval to several institutions, including Paxos, to obtain national trust bank licenses. While this isn't a traditional "commercial bank" capable of accepting deposits and receiving FDIC insurance, it signifies that Paxos is transitioning from a contract manufacturer to a licensed, publicly recognized issuer. Furthermore, by placing the framework of the GENIUS Act within this context, you can understand why PayPal is in such a hurry. The act allows regulated banking systems to issue payment-type stablecoins through subsidiaries, increasingly concentrating issuance rights and revenue chains in the hands of "licensed entities." Previously, PayPal could treat stablecoins as an outsourced module. Now, with stronger regulatory oversight, the outsourcing partner is no longer just a supplier; it can become an alternative partner, or even a potential competitor. PayPal's predicament lies in the fact that it neither controls the issuance platform nor its regulatory authority. The advancement of USDC and the OCC's approval of trust licenses remind it of one thing: in the stablecoin battle, the ultimate competition isn't about who issues the stablecoin first, but about who can control the issuance, custody, clearing, and compliance. Therefore, PayPal's ambition is less about becoming a bank and more about acquiring a ticket to the game; otherwise, it will forever remain an outsider. Even more critically, stablecoins pose a significant threat to PayPal's core business. PayPal's most profitable business is e-commerce payments, which rely on a 2.29% to 3.49% transaction fee per transaction. Stablecoins operate on a completely different logic; they charge almost no transaction fees and generate revenue through interest earned on user funds held in government bonds. When Amazon begins accepting USDC and Shopify launches stablecoin payments, merchants face a simple arithmetic problem: if they can use near-zero-cost stablecoins, why pay PayPal a 2.5% toll? Currently, e-commerce payments account for more than half of PayPal's revenue. In the past two years, it has watched its market share plummet from 54.8% to 40%. If it doesn't gain control over stablecoins soon, PayPal's competitive advantage will be completely wiped out. PayPal's current situation is similar to Apple's when it launched Apple Pay Later. In 2024, lacking a banking license and constrained by Goldman Sachs, Apple ultimately shut down the service and retreated to its core strength: hardware. Apple could retreat because finance was merely icing on the cake; hardware was its core competitiveness. But PayPal has nowhere to retreat. It has no phones, no operating system, no hardware ecosystem. Finance is its entirety, its sole source of sustenance. Apple's retreat is a strategic contraction, but if PayPal dares to retreat, death awaits it. Therefore, PayPal must move forward. It must obtain that banking license and seize back the issuance, control, and profit rights of stablecoins. However, opening a bank in the United States is no easy feat. Especially for a tech company burdened with $7 billion in loan assets, the regulatory approval threshold is terrifyingly high. Thus, to secure this ticket to the future, PayPal meticulously crafted a brilliant capital magic trick. PayPal's Escape Plan Now, let's return to the contradiction mentioned at the beginning of the article. On September 24th, PayPal announced the sale of its $7 billion "buy now, pay later" lending package to Blue Owl, with its CFO publicly declaring a move to "lean up." At the time, most Wall Street analysts believed this was merely a way to embellish financial statements and make cash flow look better. However, if you consider this in conjunction with the banking license application three months later, you'll find that it's not a contradiction, but rather a carefully designed combination of moves. If PayPal doesn't sell these $7 billion in receivables, its chances of successfully obtaining a banking license are virtually zero. Why? Because in the United States, applying for a banking license requires an extremely rigorous "medical examination." The regulatory agency (FDIC) uses a yardstick called "capital adequacy ratio." The logic is simple: for every high-risk asset (such as loans) on your balance sheet, you must set aside a corresponding proportion as collateral to mitigate risk. Imagine if PayPal, carrying this $7 billion loan, knocked on the FDIC's door. The regulator would immediately see the heavy burden: "You're carrying so many risky assets; what if there are bad debts? Do you have enough money to cover them?" This not only means PayPal would need to pay astronomical margin deposits, but could also directly lead to approval rejection. Therefore, PayPal must undergo a comprehensive restructuring before its formal medical examination. This sale to Blue Owl is called a forward liquidity agreement in financial jargon. This design is very clever. PayPal has dumped all its new loan claims (i.e., "printed money") and default risks for the next two years onto Blue Owl; but it cleverly retained its underwriting rights and customer relationships, essentially keeping the "money printing machine" for itself. From the users' perspective, they are still borrowing money from PayPal and repaying through the PayPal app; the experience remains unchanged. However, in the FDIC's report, PayPal's balance sheet instantly appears remarkably clean and clear. Through this clever maneuver, PayPal has transformed its identity, changing from a lender burdened with heavy bad debt risk to a mere intermediary earning only risk-free service fees. Such deliberate asset transfers to pass regulatory approval are not unprecedented on Wall Street, but their decisiveness and scale are truly rare. This precisely demonstrates the determination of PayPal's management—even at the cost of sharing their current profits (loan interest) with others—to secure a more sustainable future. Moreover, the window of opportunity for this high-stakes gamble is rapidly closing. PayPal's urgency stems from the fact that the "backdoor" it has its eye on is being shut down, even welded shut, by regulators. The Backdoor That's About to Close PayPal's license is officially called an "Industrial Loan Company" (ILC). If you're not a seasoned financial professional, you've probably never heard of this name. But it's one of the most enigmatic and coveted entities in the US financial regulatory system. Looking at the list of companies holding ILC licenses, a strong sense of incongruity arises: BMW, Toyota, Harley-Davidson, Target… You might ask: Why would these car dealerships and general merchandise stores open a bank? That's the magic of the ILC. This is the only "regulatory loophole" in the US legal system that allows non-financial giants to legally operate banks. This loophole stems from the Competition for Equal Banking Act (CEBA) passed in 1987. Although the law is named "equal," it leaves behind an extremely unequal privilege: it exempts the parent company of an ILC from the obligation to register as a "bank holding company." If you apply for a regular banking license, the parent company must accept the comprehensive, penetrating supervision of the Federal Reserve. But if you hold an ILC license, the parent company (such as PayPal) is not subject to the Federal Reserve's jurisdiction, only to FDIC and Utah-level regulation. This means you enjoy the national-level privileges of banks accepting deposits and accessing the federal payment system, while perfectly avoiding the Federal Reserve's interference in your business empire. This is what's known as regulatory arbitrage, and what's even more enticing is that it allows for "mixed operations." This is how BMW and Harley-Davidson operate—vertical integration of the industry chain. BMW Bank doesn't need physical counters because its business is perfectly embedded in the car-buying process. When you decide to buy a BMW, the sales system automatically connects to BMW Bank's loan services. For BMW, it profits from your car purchase while also absorbing the car loan interest. Harley-Davidson is even more so; its bank can even provide loans to motorcyclists rejected by traditional banks because only Harley knows that the default rate for these die-hard fans is actually very low. This is precisely the ultimate form PayPal has always dreamed of: payments on the left, banking on the right, and stablecoins in the middle, with no outside interference in any环节. Seeing this, you might be wondering, since this loophole is so useful, why don't Walmart and Amazon apply for this license and open their own banks? Because the traditional banking industry vehemently opposes this backdoor. Bankers believe that allowing commercial giants with massive amounts of user data to open banks is a devastating blow. In 2005, Walmart applied for an ILC license, which triggered a nationwide uproar in the US banking industry. The banking association lobbied Congress aggressively, arguing that if Walmart Bank used its data advantage to provide cheap loans only to those who shopped at Walmart, how could community banks survive? Under immense public pressure, Walmart was forced to withdraw its application in 2007. This event directly led to a regulatory "freeze" on ILCs; from 2006 to 2019, for a full 13 years, the FDIC did not approve any applications from commercial companies. It wasn't until 2020 that Square (now Block) finally broke the deadlock. But now, this newly reopened backdoor faces the risk of being permanently closed again. In July 2025, the FDIC suddenly released a draft for public comment on the ILC framework, which was seen as a strong signal of tightening regulations. Meanwhile, related legislative proposals in Congress never ceased. As a result, everyone began scrambling for licenses. The number of US bank license applications reached a record high of 20 in 2025, with the OCC (Office of the Comptroller of the Currency) alone receiving 14 applications, equivalent to the total number received in the previous four years. Everyone knew this was the last chance before the market closed. PayPal is racing against regulators. If it doesn't get in before the loopholes are completely closed by law, that door may be closed forever. The license PayPal painstakingly obtained is essentially an "option." Its current value is certain: independently issuing loans and profiting from interest rate spreads in a high-interest environment. But its future value lies in granting PayPal the right to enter currently prohibited but potentially lucrative sectors. Look at what Wall Street envies most: not payments, but asset management. Before obtaining a banking license, PayPal could only act as a simple intermediary, helping users move funds. But once it acquires an ILC license, it gains legal custodian status. This means PayPal can legitimately hold Bitcoin, Ethereum, and even future RWA assets for its 430 million users. Furthermore, under the future GENIUS Act framework, banks may be the only legal entry point allowed to connect to DeFi protocols. Imagine a future PayPal app with a "High-Yield Investment" button, connected to on-chain protocols like Aave or Compound, with PayPal Bank bridging the seemingly insurmountable compliance barrier. This will completely break down the wall between Web2 payments and Web3 finance. In this dimension, PayPal is no longer just about transaction fees with Stripe, but about building a financial operating system for the crypto era. It's attempting to evolve from processing transactions to managing assets. Transactions are linear, with a ceiling, while asset management is an infinite game. Understanding this layer is key to understanding why PayPal launched this offensive at the end of 2025. It is acutely aware that it is caught in the cracks of the times. Behind it lies the fear of traditional payment profits being wiped out by stablecoins; ahead lies the urgency of the imminent permanent closure of the ILC regulatory backdoor. To squeeze through that door, it had to sell $7 billion in assets in September as a painful but necessary restructuring, just to obtain that life-or-death ticket. If you extend the timeline to 27 years, you'll see a cycle brimming with a sense of destiny. In 1998, when Peter Thiel and Elon Musk founded the precursor to PayPal, their mission was to "challenge banks," to eliminate outdated and inefficient financial institutions with electronic money. 27 years later, this former "dragon slayer" is now desperately trying to "become a bank." In the business world, there are no fairy tales, only survival. On the eve of cryptocurrency reshaping the financial order, remaining an "outsider" outside the system is a dead end. Only by acquiring that status, even through back channels, can one survive into the next era. This is a life-or-death struggle that must be completed before the window closes. If they win, they will be JPMorgan Chase of the Web3 era; if they lose, they will merely be relics of the previous generation of the internet. Time is running out for PayPal.