PayPal’s Banking Ambitions: A Strategic Pivot Under Scrutiny

PayPal is undertaking a significant transformation of its business model, aiming to reduce its reliance on partner banks. The payment giant has applied for its own banking license in the United States, a move designed to grant it greater control, improve margins, and foster direct customer relationships. However, the market's initial reaction has been one of skepticism. Investors are questioning whether this strategic shift can reignite the company's growth engine.

In mid-December, PayPal formally submitted applications to establish its own bank, dubbed "PayPal Bank," with both the FDIC and Utah's financial regulator. The proposed entity would be structured as an Industrial Loan Company (ILC).

The core objective is straightforward: PayPal seeks to originate loans directly from its own balance sheet and hold customer deposits, primarily for its base of approximately 420,000 small business clients. Currently, the company depends heavily on third-party banks for these functions. Securing an ILC license would eliminate these intermediaries, potentially boosting margins in its credit business substantially.

This represents a major strategic evolution:
* Funding loans directly through customer deposits rather than via partner banks.
* Gaining enhanced control over credit issuance and risk management.
* Unlocking potential for higher earnings from its small and medium-sized enterprise segment.

The path forward, however, is lengthy. ILC approval processes typically take between 12 and 18 months. Consequently, any meaningful financial contribution from this initiative is unlikely before late 2026 or 2027.

Market Sentiment and Competitive Pressures

Wall Street has taken note of PayPal's ambitions, but concerns persist. On December 18, Morgan Stanley downgraded the stock to "Underweight," setting a price target of $51. The firm's analysis suggests that while a banking license may improve credit profitability, it does not address the core challenge of declining market share in the "branded checkout" space—the ubiquitous PayPal button seen across e-commerce platforms.

Shortly after, Wells Fargo maintained a neutral "Hold" rating. Its analysts view the regulatory move as a sensible long-term strategic decision but do not expect it to provide short-term relief for the weaker growth in PayPal's primary business.

Should investors sell immediately? Or is it worth buying PayPal?

Simultaneously, PayPal is expanding the ecosystem around its proprietary stablecoin, PYUSD. A rewards program offering 3.7% on PYUSD holdings launched in the summer of 2025, aiming to increase the system's Total Value Locked. Recent speculation about a potential rate increase to 4% has generated some buzz in this area. Despite these efforts, the program has yet to offset the broader slowdown in transaction volume growth.

Valuation, Regulatory Hurdles, and Legacy Issues

By pursuing an ILC license, PayPal joins a select group of fintech firms moving toward full banking capabilities. Block (Square) is a prominent example, having already secured an ILC license for its Square Financial Services unit. The regulatory environment remains stringent, and delays in the review process are common.

The company also contends with reputational headwinds from the recent past. In December 2024, an investigative report by YouTuber "MegaLag" concerning the browser extension "Honey" raised questions about data usage and discount transparency. Although the debate has since subsided, it contributed to a dampened sentiment that management now hopes to overcome with the "PayPal Bank" narrative and its broader strategic repositioning.

The current valuation is particularly noteworthy. PayPal shares are trading at a forward P/E ratio of approximately 10.5—a historically low level for the company. Many competitors in the fintech sector command multiples of this figure. The market is sending a clear signal: announcements alone are insufficient without a visible reacceleration in revenue growth.

Technical Performance and Near-Term Catalysts

From a technical perspective, the stock remains under pressure. Since the start of the year, the share price is down roughly 39% in euro terms, trading nearly 40% below its 52-week high. Recently, the stock hovered just above its annual low, positioned clearly below its key 50-, 100-, and 200-day moving averages.

In the near term, attention will focus on initial regulatory feedback regarding the ILC application, even though formal decisions are months away. Additionally, updates on Venmo's monetization or progress on the banking license in the coming weeks could influence trading sentiment. Ultimately, the critical factor will be whether PayPal can demonstrate a return to higher growth rates in its core business, complementing its regulatory offensive.