Selling assets while grabbing a banking license—what is PayPal rushing for?

Author: Sleepy.txt

PayPal is about to open a bank.

On December 15, this global payments giant with 430 million active users officially submitted applications 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 24, PayPal announced a major deal, bundling and selling up to $7 billion of its “buy now, pay later” loan assets to asset management firm Blue Owl.

During the conference call, CFO Jamie Miller confidently emphasized to Wall Street that PayPal’s strategy was to “maintain a lightweight balance sheet,” to free up capital and improve efficiency.

These two actions are contradictory—pursuing “lightness” on one hand, while applying for a banking license on the other. It’s important to note that operating a bank is one of the heaviest businesses in the world—you need to pay huge reserves, comply with strict regulations, and bear the risks of deposits and loans.

Behind this conflicting decision, there must be a compromise driven by some urgent reason. This is not a routine business expansion but more like a landing operation targeting regulatory red lines.

The official reason given by PayPal for opening a bank is “to provide lower-cost loans to small businesses,” but this reason hardly holds water.

Data shows that since 2013, PayPal has issued over $30 billion in loans to 420,000 small businesses worldwide. In other words, in these 12 years without a banking license, PayPal has still managed to grow its lending business vigorously. So why apply for a bank license at this particular time?

To answer this, we need to clarify: who actually issued these $30 billion in loans?

Lending, PayPal is just a “sub-landlord”

The lending data in PayPal’s official press releases look impressive, but there’s a core fact often glossed over: none of these loans were actually issued by PayPal itself. Instead, they were issued by a bank based in Salt Lake City, Utah—WebBank.

Most people have probably never heard of WebBank. It’s a very mysterious bank—it doesn’t have consumer-facing branches, doesn’t advertise, and its official website is very minimal. But in the hidden corners of American fintech, it’s an unavoidable behemoth.

PayPal’s Working Capital and Business Loan programs, Affirm’s installment payments, and Upgrade’s personal loan platform—all these behind-the-scenes lenders are WebBank.

This involves a business model called “Banking as a Service (BaaS)”: PayPal handles customer acquisition, risk control, and user experience, while WebBank only issues the licenses.

A more straightforward analogy: in this business, PayPal is just a “sub-landlord,” with the actual property deed held by WebBank.

For a tech company like PayPal, this was once a perfect solution. Applying for a bank license is too difficult, slow, and expensive. Applying for lending licenses in all 50 US states is an administrative nightmare. Renting WebBank’s license is like a VIP fast lane.

But “renting” a bank is risky—the landlord could stop renting at any time, or even sell or demolish the property.

In April 2024, a black swan event shocked all US fintech companies. A BaaS intermediary called Synapse suddenly filed for bankruptcy, freezing $265 million of customer funds for over 100,000 users, with $96 million missing, causing some to lose their life savings.

This disaster revealed a major flaw in the “sub-landlord” model: if any link in the chain fails, the trust built with users can collapse overnight. Regulators began to scrutinize BaaS models more strictly, fining and restricting several banks over compliance issues.

For PayPal, although it partners with WebBank rather than Synapse, the risk logic is the same. If WebBank encounters problems, PayPal’s lending business could grind to a halt; if WebBank adjusts cooperation terms, PayPal has no bargaining power; if regulators demand tighter cooperation, PayPal can only passively accept. This is the dilemma of being a “sub-landlord”—doing business hard, but the lifeline is in someone else’s hands.

In addition, another more naked temptation pushed management to consider going solo: the huge profits in the high-interest era.

In the past decade of zero interest rates, banking was not a sexy business because the interest margin was thin. But today, the situation is completely different.

Even though the Federal Reserve has started to cut rates, the benchmark interest rate in the US remains around 4.5%, a historic high. This means deposits are essentially a gold mine.

Look at PayPal’s current predicament: it has a huge fund pool of 430 million active users’ money, which sits in user PayPal accounts. PayPal then has to deposit this money into partner banks.

These partner banks use this low-cost money to buy US Treasuries yielding around 5% or to issue higher-interest loans, earning substantial profits, while PayPal only gets a tiny slice.

If PayPal obtains its own banking license, it can directly turn these idle funds of 430 million users into its own low-cost deposits, then buy Treasuries on one hand and lend on the other, capturing all the interest margin. During this high-interest window, this could mean tens of billions of dollars in profit difference.

But if the goal is just to get rid of WebBank, PayPal should have acted long ago. Why wait until 2025?

This leads to another even more urgent and deadly concern inside PayPal: stablecoins.

Issuing stablecoins, PayPal is still a “sub-landlord”

If the “sub-landlord” role in lending was just about earning less and worrying more, in the stablecoin arena, this dependency is evolving into a real survival crisis.

In 2025, PayPal’s stablecoin PYUSD experienced explosive growth, tripling its market cap in three months to $3.8 billion, and even YouTube announced in December that it would integrate PYUSD payments.

But behind these headlines, there’s a fact PayPal doesn’t emphasize in its press releases: PYUSD is not issued by PayPal itself but through a partnership with Paxos in New York.

This is another familiar “white-label” story—PayPal is just a brand licensee, similar to Nike licensing its logo to contract manufacturers instead of producing shoes itself.

In the past, this was more like a division of labor: PayPal handled products and traffic, while Paxos handled compliance and issuance, each doing their part.

But on December 12, 2025, this division began to change. The US Office of the Comptroller of the Currency (OCC) granted “conditional approval” for national trust bank charters to several institutions, including Paxos.

While these are not traditional “commercial banks” capable of accepting deposits and FDIC insurance, it signals that Paxos is moving from an OEM to a licensed issuer with a formal standing.

Adding the framework of the “GENIUS Act,” it becomes clear why PayPal is so anxious. The bill allows regulated banking systems to issue payment stablecoins through subsidiaries, with issuance rights and profit chains increasingly concentrated in “licensed” entities.

Previously, PayPal could treat stablecoins as an outsourced module, but once the outsourcer gains a stronger regulatory identity, it’s no longer just a supplier—it can become a partner or even a potential competitor.

PayPal’s dilemma is that it neither controls the issuance infrastructure nor the regulatory identity.

The progress of USDC and the OCC’s approval of trust licenses are reminders: in the stablecoin race, the ultimate contest is not who issues first but who can control the issuance, custody, settlement, and compliance ropes.

Therefore, PayPal’s goal is less about becoming a bank and more about buying a ticket in. Otherwise, it will always remain on the outside.

Even more critically, stablecoins pose a dimensionality reduction attack on PayPal’s core business.

PayPal’s most profitable business is e-commerce payments, earning 2.29–3.49% per transaction. But the logic of stablecoins is entirely different—they almost don’t charge transaction fees, making money from interest on user deposits in government bonds.

When Amazon starts accepting USDC, and Shopify launches stablecoin payments, merchants will face a simple question: if they can use near-zero-cost stablecoins, why pay PayPal’s 2.5% transaction fee?

Currently, e-commerce payments account for over half of PayPal’s revenue. Over the past two years, its market share has dropped from 54.8% to 40%. If it doesn’t seize the initiative in stablecoins, PayPal’s moat will be completely eroded.

PayPal’s current situation is very similar to Apple when it launched the Apple Pay Later service. In 2024, Apple had to shut down this service because it lacked a banking license and was heavily dependent on Goldman Sachs, returning to its core hardware business. Apple could retreat because finance was just a bonus; hardware was its core strength.

But PayPal has no retreat.

It has no smartphones, no operating system, no hardware ecosystem. Finance is everything to it—its only warehouse of value. Apple’s retreat was strategic contraction; if PayPal dares to retreat, it risks death.

Therefore, PayPal must move forward. It must obtain that banking license and reclaim the issuance, control, and profit rights of stablecoins.

But how easy is it to open a bank in the US? Especially for a tech company burdened with $7 billion in loan assets, regulatory approval is daunting.

So, to get this ticket to the future, PayPal has devised a brilliant capital magic trick.

PayPal’s strategic escape

Now, let’s return to the contradiction mentioned at the beginning.

On September 24, PayPal announced selling $7 billion of “buy now, pay later” receivables to Blue Owl, with the CFO loudly claiming to “lighten” the balance sheet. Most Wall Street analysts thought this was just to improve financials and make cash flow look better.

But if you look at this alongside the bank license application three months later, you’ll see it’s not a contradiction but a carefully orchestrated combo punch.

Without selling these $7 billion in receivables, PayPal’s chances of successfully applying for a bank license are nearly zero.

Why? Because in the US, applying for a bank license requires passing a very strict “health check”—the regulator (FDIC) holds a ruler called “capital adequacy ratio.”

The logic is simple: the amount of high-risk assets (like loans) on your balance sheet determines how much collateral you need to withstand risks.

Imagine if PayPal, carrying this $7 billion in loans, knocked on FDIC’s door. The regulator would see this heavy burden: “You’re carrying so many risky assets—what if there’s a bad debt? Do you have enough to cover it?” This not only means PayPal would need to pay astronomical reserves but could also lead to outright rejection.

Therefore, PayPal must slim down before the health check.

This sale to Blue Owl is called a forward flow agreement in financial jargon. It’s a clever design: PayPal transfers future new loan receivables (the “printed money”) and default risks to Blue Owl, but retains underwriting rights and customer relationships—keeping the “printing press” for itself.

To users, it still looks like they’re borrowing from PayPal and repaying within the PayPal app—nothing changes in experience. But on the FDIC’s balance sheet, PayPal’s assets suddenly look very clean and lean.

Through this strategic move, PayPal completes a “strategic escape,” transforming from a heavy bad-debt risk lender into a risk-free service provider.

This kind of asset reallocation to pass regulatory scrutiny is not unprecedented on Wall Street, but doing it so decisively and on such a scale is rare. It proves the management’s determination: even if it means sharing the juicy profits (loan interest) with others, it’s willing to do so for a longer-term ticket.

And this high-stakes gamble is closing fast. PayPal’s urgency stems from the fact that the “backdoor” it relies on is being shut and even welded shut by regulators.

The closing backdoor

The license PayPal applied for is called “Industrial Bank” (Industrial Loan Company, ILC). If you’re not a deep finance professional, you probably haven’t heard of it. But it’s one of the most bizarre and coveted entities in the US financial regulatory system.

Looking at the list of companies holding ILC licenses, a strong sense of dissonance arises: BMW, Toyota, Harley-Davidson, Target…

You might ask: why would car dealers or grocery stores want to open banks?

This is the magic of ILC. It’s the only regulatory loophole in US law that allows non-financial giants to legally operate banks.

This loophole stems from the 1987 “Competitive Equality Banking Act” (CEBA). Although the law’s name suggests “equality,” it actually grants an extremely unequal privilege: it exempts ILC parent companies from the obligation to register as “bank holding companies.”

If you apply for a regular bank license, your parent company must accept comprehensive supervision by the Federal Reserve. But if you hold an ILC license, your parent (e.g., PayPal) is not under Fed supervision, only FDIC and Utah state regulation.

This means you enjoy the national privilege of deposit-taking and access to the federal payment system, while avoiding the Fed’s interference in your business scope.

This is regulatory arbitrage, and even more enticing is that it allows “banking and commerce” to be combined—vertical integration of the industry chain.

BMW Bank doesn’t need physical counters because its business is embedded in the car-buying process. When you decide to buy a BMW, the sales system automatically connects to BMW Bank’s loan service.

For BMW, it earns both the profit from selling the car and the interest from the car loan. Harley-Davidson is even more so—it can lend to motorcycle enthusiasts rejected by traditional banks because only Harley knows that their default rate is actually quite low.

This is the ultimate form PayPal dreams of: payments on the left, banking on the right, with stablecoins in the middle—no outsiders involved.

Now, you might ask: since this loophole is so useful, why don’t Walmart or Amazon apply for this license and open their own banks?

Because traditional banks hate this backdoor.

Bankers see it as a blow to their industry—allowing tech giants with massive user data to operate banks is a form of dimensionality reduction. In 2005, Walmart applied for an ILC license, which triggered a nationwide banking industry revolt. Banking associations lobbied Congress fiercely, arguing that if Walmart used its data advantage to offer cheap loans only to its shoppers, community banks would be doomed.

Under immense public pressure, Walmart withdrew its application in 2007. This event led to a “freeze” on ILC approvals. From 2006 to 2019, FDIC did not approve any new applications from corporations. It wasn’t until 2020 that Square (now Block) finally broke the deadlock.

But now, this once-reopened backdoor faces the risk of being permanently closed.

In July 2025, FDIC issued a consultation paper on the ILC framework, signaling a tightening of regulation. Meanwhile, related legislative proposals in Congress have never stopped.

As a result, everyone is rushing to get licenses. In 2025, the number of US bank license applications hit a record high of 20, with 14 submitted to OCC—more than the total of the previous four years combined.

Everyone knows this is the last chance before the door closes. PayPal is racing against regulators—if it doesn’t rush in before the loophole is fully closed by law, the door may be forever shut.

Life-and-death breakout

The license PayPal is fighting for is called “Industrial Bank” (ILC). If you’re not a deep finance insider, you probably haven’t heard of it. But it’s one of the most bizarre and coveted entities in the US financial regulatory system.

Looking at the list of companies with ILC licenses, a strong sense of dissonance arises: BMW, Toyota, Harley-Davidson, Target…

You might ask: why would car dealers or grocery stores want to open banks?

This is the magic of ILC. It’s the only regulatory loophole in US law that allows non-financial giants to legally operate banks.

This loophole stems from the 1987 “Competitive Equality Banking Act” (CEBA). Although the law’s name suggests “equality,” it actually grants an extremely unequal privilege: it exempts ILC parent companies from the obligation to register as “bank holding companies.”

If you apply for a regular bank license, your parent company must accept comprehensive supervision by the Federal Reserve. But if you hold an ILC license, your parent (e.g., PayPal) is not under Fed supervision, only FDIC and Utah state regulation.

This means you enjoy the national privilege of deposit-taking and access to the federal payment system, while avoiding the Fed’s interference in your business scope.

This is regulatory arbitrage, and even more enticing is that it allows “banking and commerce” to be combined—vertical integration of the industry chain.

BMW Bank doesn’t need physical counters because its business is embedded in the car-buying process. When you decide to buy a BMW, the sales system automatically connects to BMW Bank’s loan service.

For BMW, it earns both the profit from selling the car and the interest from the car loan. Harley-Davidson is even more so—it can lend to motorcycle enthusiasts rejected by traditional banks because only Harley knows that their default rate is actually quite low.

This is the ultimate form PayPal dreams of: payments on the left, banking on the right, with stablecoins in the middle—no outsiders involved.

Now, you might ask: since this loophole is so useful, why don’t Walmart or Amazon apply for this license and open their own banks?

Because traditional banks hate this backdoor.

Bankers see it as a blow to their industry—allowing tech giants with massive user data to operate banks is a form of dimensionality reduction. In 2005, Walmart applied for an ILC license, which triggered a nationwide banking industry revolt. Banking associations lobbied Congress fiercely, arguing that if Walmart used its data advantage to offer cheap loans only to its shoppers, community banks would be doomed.

Under immense public pressure, Walmart withdrew its application in 2007. This event led to a “freeze” on ILC approvals. From 2006 to 2019, FDIC did not approve any new applications from corporations. It wasn’t until 2020 that Square (now Block) finally broke the deadlock.

But now, this once-reopened backdoor faces the risk of being permanently closed.

In July 2025, FDIC issued a consultation paper on the ILC framework, signaling a tightening of regulation. Meanwhile, related legislative proposals in Congress have never stopped.

As a result, everyone is rushing to get licenses. In 2025, the number of US bank license applications hit a record high of 20, with 14 submitted to OCC—more than the total of the previous four years combined.