PayPal Holdings (PYPL): Upcoming segment modeling to improve transparency, but we see limited upside from an SOIP perspective

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PayPal Holdings (PYPL): Upcoming segment modeling to improve transparency, but we see limited upside from an SOIP perspective

Goldman Sachs PayPal Holdings (PYPL)

Building up to Branded checkout Transaction margin drivers

To address the varying economics across the PayPal and Checkout business, we have

segmented the model into US and international. This addresses the lower take rates and

transaction costs in the large international markets, and helps fine tune our estimates for

take rates and transaction expenses in the segment. Note that we see overall transaction

margins shaking out in a similar zip code within branded checkout across the US and

international markets, despite the large difference in pricing, owing largely to structural

differences in card acceptance costs and the prevalence of low cost open banking rails in

Europe. This implies that overall transaction margin dollars in branded checkout are split

similarly to volumes, with roughly ~34% coming from the US and ~66% from

international.

1) International: Lower gross take rates and much lower transaction costs yield

attractive transaction margin for core branded checkout

n Branded Checkout: PYPL disclosed that roughly 60% of branded checkout volumes

come from outside the US. Leveraging take rates that are just north of 200bps

(leveraging pricing disclosures, stepping down over time owing to price compression

and mix shift to large enterprise), we estimate roughly $6bn in branded revenues

coming through international markets. With lower carded repayments (on total

company level ~50/50 card vs ACH and stored funds) relative to the US, we assume

roughly a third of transaction funding comes from cards, putting total transaction

costs at roughly 20bps of branded TPV. After taking into account modest costs for