PayPal's Merchant Loss Rate Climbs Back to 8.3%
PayPal's annualized net charge-off rate on its merchant loans and advances was 8.3% in the third quarter, up from 7.3% a year earlier and from 4.6% in the first quarter of 2025. PayPal also reported 8.3% for the third quarter of 2024, a level the filings we reviewed do not explain, before the rate fell; the climb since early 2025 is the trend that matters. The book grew 9%, to $1.9 billion.1 2
As a year ago, most of the losses come from the previous year's loans: $96 million of the $132 million in gross charge-offs in the first nine months came from loans PayPal made in 2025, much as $69 million of $97 million came from 2024 loans a year earlier. What changed is that the 2025 loans were a bigger group, $1.68 billion outstanding at the end of 2025 against $1.37 billion for the 2024 loans a year before, and they are doing worse at the same age: 18.4% of the 2025 loans still outstanding were 90 days or more late at September 30, against 15.8% of the 2024 loans a year earlier.1 2
PayPal also wants to become a bank. Its chief financial officer, Jamie Miller, told the KBW Fintech Ecosystem Conference this week that a bank would support the "merchant lending that underpins our work" and would also "diversify our funding sources," Banking Dive reported on November 13.3
Bottom line for fintech lenders and trade credit providers: We read the 8.3% as a real but modest softening, concentrated in loans PayPal made in 2025, with Enova's small-business delinquency also up. It can reach your cost of capital, because your warehouse lenders and loan buyers can see this number too. On the credit side, check applicants for a PayPal Working Capital advance, which is repaid out of the sales PayPal processes, so a bank statement alone may not show it as a loan payment.4
Since the 4.6% low in the first quarter of 2025, the rate has risen in four of six quarters, with a flat fourth quarter of 2025 and a dip to 7.0% in the first quarter of 2026. Each figure is the annualized net loss for one quarter, excluding fraud losses:1 2 4 5 6
The book holds two products. PayPal Working Capital lets a merchant borrow a percentage of its annual PayPal payment volume for a fixed fee. PayPal Business Loans are short-term loans repaid in fixed periodic payments, generally over 3 to 12 months.4 PayPal reports one charge-off rate for both, so the 8.3% describes a blended book of revenue-based advances and short-term loans.
PayPal's merchant book, a year apart (dollar figures rounded; balances net of the share sold to its partner institution; coverage is our estimate):1 2
Q3 2025 | Q3 2026 | |
|---|---|---|
Merchant loans, advances and fees outstanding | $1.7B | $1.9B |
Net charge-off rate (annualized, excluding fraud) | 7.3% | 8.3% |
90 days or more past the expected repayment period | 3.5% | 4.0% |
Gross charge-offs, first nine months | $97M | $132M |
Allowance for credit losses | $163M | $192M |
Allowance in years of losses at the quarter's rate (approx.) | 1.3 | 1.2 |
PayPal reports the 9% growth on unrounded balances. Most of it came from about $100 million more in U.S. PayPal Business Loans and about $50 million more in Working Capital in Germany.1
What Fintech Executives Need to Know
Does this change your cost of capital or your access to it?
It can, through the people who fund you. PayPal publishes this rate every quarter with its definition attached, so your warehouse lender, forward-flow buyers and equity investors can see it as easily as you can. In our view, a public small-business loss figure moving the wrong way gives them a number to point to when they set your advance rate, eligibility criteria or purchase price, whatever your own book is doing. Go into those conversations with your own numbers on the same basis, and with the reading above: the weakness sits in PayPal's 2025 loans, and its newest loans are holding about level.
Reserve coverage is the sharper measure. PayPal's merchant allowance of $192 million at September 30 covers about 1.22 years of losses at the third-quarter rate, against about 1.29 years a year earlier ($163 million against a 7.3% rate on $1,736 million), a modest slip. The allowance rose 18%, faster than the 9% growth in the book, but losses rose faster still; against the $170 million at year-end it is up 13%, which PayPal describes as having "remained relatively consistent."1 2 Our coverage figures are estimates on period-end balances, using the quarterly rate PayPal publishes; its rate uses average daily balances.
There is also competition for the same money. PayPal funds "a lot through our own free cash flow and our cash on balance sheet" but has "begun taking books off balance sheet in Europe and in the U.S.," and last year it sold some European buy now, pay later receivables to KKR.3 If PayPal sells U.S. merchant loans, in our view it becomes another seller of small-business credit to the private credit buyers you sell to. A bank would add deposits, which Miller called "another cost-efficient way" to fund, though she still expects PayPal "to be generally balance sheet light."3
Does this change the credit risk of the businesses you extend terms to?
Mostly through stacking. A Working Capital advance is "repaid through a fixed percentage of the merchant's future payment volume that PayPal processes."4 Because PayPal takes its share as it processes each sale, the repayment likely shows up on the merchant's bank statement as smaller PayPal transfers rather than as a loan payment, and it comes out of the same sales your invoice or your loan payment depends on. A Business Loan, with fixed payments on a schedule, is probably easier to spot. To look for either, make a PayPal Activity Download report for the past three months a required document, collected with written consent. PayPal lets account holders export it as a CSV or PDF, with a preset for the past three months, but its page does not show how advance repayments are labeled, so test the report on a sample merchant before relying on it.7
Late payments are up across the book. At September 30, 10.8% of PayPal's merchant balances were at least 30 days late (4.5% at 30 to 59 days, 2.3% at 60 to 89 days and 4.0% at 90 days or more), against 9.8% a year earlier.1 2 The newest loans are holding about level: 6.0% of loans made in 2026 were at least 30 days late at September 30, against 5.7% of loans made in 2025 at the same point last year.1 2 That is an early reading, since late shares rise as loans age. Enova, which also lends to small businesses, reported a bigger rise, with its small-business share more than 30 days delinquent at 7.8%, up from 6.2%, on a book that grew 34%. Enova said that is within the 6.2% to 8.8% range of the prior three years, a range whose low end is last year's figure.8
How do I compare PayPal's 8.3% with my own charge-off rate?
Match four things first.
The calculation. PayPal divides one quarter's net losses, annualized, by the average daily balance.1
The charge-off point. PayPal writes off a Business Loan once repayments are 180 days past the contractual date, and a Working Capital advance once repayments are 180 days behind its expectation with no payment in 60 days, or 360 days behind regardless.4 If you charge off sooner, your rate can run higher on the same book.
The product mix. Because the rate covers both products, compare it with your whole book, not a single product line.
Fraud. The rate leaves fraud losses out, and the filing gives no fraud figure for the merchant book. Company-wide, PayPal said its transaction losses fell from a year earlier, partly on lower fraud losses, but those are losses on payments rather than loans.1
What would a PayPal bank change, and will it get one?
As proposed in its December 15, 2025 applications to the Utah Department of Financial Institutions and the FDIC, PayPal Bank, a Utah-chartered industrial loan company, would provide small-business lending, offer interest-bearing savings accounts and seek direct membership in U.S. card networks.9 Today PayPal's U.S. merchant loans are made under a program agreement with an independent chartered financial institution, and PayPal buys the receivables and services them, about $1.7 billion in the first nine months of 2026.1 4 An industrial loan company lets a parent own an insured bank without becoming a bank holding company supervised by the Federal Reserve; under the FDIC's 2020 rule, such a parent must agree to keep the bank's capital and liquidity at levels the FDIC deems necessary.10
Whether it happens is unknown. PayPal's annual report says there is "no assurance" of approval, and neither the report nor Miller gave a timeline.3 4 Two nonbank lenders have withdrawn the regulatory applications for their bank purchases: Enova for Grasshopper Bancorp on September 14, its chief executive saying "Regulators do not have clear standards for nonbanks that want to become banks," and OppFi for BNC on November 3, citing "a lack of clearly articulated standards."11 12 Both were bank purchases, while PayPal is applying for a new charter.
What don't the filings tell us?
Whether the weaker 2025 loans reflect PayPal's own underwriting or a harder year for small businesses. PayPal's data alone cannot separate the two; Enova's rise suggests it is not PayPal alone.
Which product is weaker. Most of the book's growth was U.S. Business Loans, but PayPal does not split charge-offs by product, so we cannot confirm that Business Loans are the cause.
How much PayPal lent in each year. It reports what is still outstanding by year of origination, but not how much it lent in each of those years, so a lifetime loss rate for each year of lending cannot be computed from the filings.1
Our Opinion
Our verdict: this is a modest softening in the two small-business books we reviewed, not a break. Loans PayPal made in 2025 are doing worse than its 2024 loans at the same age, and Enova's small-business delinquency rose more than PayPal's, though Enova calls its level within its three-year range, so we do not read this as PayPal's problem alone.1 2 8 But PayPal's newest loans are holding about level with last year's at the same age, and reserve coverage has slipped only from about 1.29 to 1.22 years. We would turn more cautious if PayPal's fourth-quarter rate moves above 8.3%, or if its 2026 loans start falling behind the 2025 loans at the same age.
For a fintech lender, the nearer risk is on the funding side: a public number moving the wrong way in front of the people who set your advance rate. Four checks follow.
Recompute your quarterly net charge-off rate on PayPal's basis, using the four matches above, and your reserve coverage as your allowance divided by annualized net charge-offs, and send both to your warehouse lender and loan buyers before they ask.
Measure each year of lending by cumulative net loss as a share of what you originated. PayPal does not publish that figure, so this check is for your own book.
Add the PayPal question and the three-month Activity Download report described above to your application.
Ask your forward-flow buyers and warehouse lender how they are reading public small-business loss data this quarter, and ask your sponsor bank, if you have one, how it would view a processor with its own charter.
A line for your board or investor update: "PayPal's annualized quarterly net charge-off rate on merchant loans and advances, excluding fraud, was 8.3% in the third quarter of 2026, up from 7.3% a year earlier and 4.6% in the first quarter of 2025. Our comparable rate on the same basis is [X], and our allowance covers [Y] years of annualized net charge-offs."
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The National Association of Home Builders' third-quarter survey posted a net easing index of -15.3, the nineteenth straight quarter in which residential builders and developers reported tighter credit; the effective rate on spec construction loans, including points, was 11.83%.13 14 If you lend to residential builders or their contractors, ask whether a borrower's projects depend on construction loans, the credit builders say keeps getting harder to get.
Asset Based Lending, a business-purpose real estate lender founded in 2010, closed ABL 2026 RTL-1 on October 26: a $200 million unrated securitization of residential transition loans, which KBRA describes as "fix-and-flip" or residential bridge loans. It is ABL's fourth deal, up from $190 million in June 2025, bringing its total to $723 million.15 16 17 HousingWire reported that up to 65% of the pool may be ground-up infill construction loans, with a weighted average credit score of 740 and loan-to-value of 64%.18 In July, KBRA projected about $4.8 billion of residential transition loan securitizations, rated and unrated, in 2026, down 12% from 2025.17 No pricing was disclosed. If you are weighing a first term deal, ask your bankers what unrated execution has cost against rated deals this year.
Sources
1 PayPal Holdings | Form 10-Q for the quarter ended September 30, 2026 (Oct. 27, 2026)
2 PayPal Holdings | Form 10-Q for the quarter ended September 30, 2025 (Oct. 28, 2025)
3 Banking Dive | Why PayPal wants to have a bank (Nov. 13, 2026)
4 PayPal Holdings | Form 10-K for the year ended December 31, 2025 (Feb. 3, 2026)
5 PayPal Holdings | Form 10-Q for the quarter ended June 30, 2026 (July 28, 2026)
6 PayPal Holdings | Form 10-Q for the quarter ended March 31, 2026 (May 5, 2026)
7 PayPal Developer | Activity Download report
8 Enova International | Form 10-Q for the quarter ended September 30, 2026
9 PayPal | PayPal Submits Applications to Establish an Industrial Bank to Expand Access to Financial Services for U.S. Small Businesses (Dec. 15, 2025)
10 FDIC | Fact Sheet: Final Rule: Parent Companies of Industrial Banks and Industrial Loan Companies (Dec. 15, 2020)
11 Enova International | Form 8-K Ex. 99.1: Enova Withdraws Bank Regulatory Applications (Sept. 14, 2026)
12 OppFi | Form 8-K Ex. 99.1: OppFi Provides Update on Pending BNC Acquisition (Nov. 3, 2026)
13 NAHB Eye On Housing | No Relief: Credit Conditions for Builders Still Tightening (Nov. 13, 2026)
14 HousingWire | Builder credit conditions tighten for 19th straight quarter (Nov. 13, 2026)
15 Asset Based Lending via PR Newswire | Asset Based Lending Announces Fourth Securitization of $200 Million (Nov. 12, 2026)
16 Asset Based Lending via PR Newswire | Asset Based Lending Announces Third Securitization of $190 Million (June 10, 2025)
17 KBRA via Business Wire | KBRA Releases Research: Laying the Foundation, the Evolution of RTL Lending (July 30, 2026)
18 HousingWire | Asset Based Lending closes $200M securitization (Nov. 10, 2026)
