# How PayPal makes money

CXProWealth Business Lens · PayPal (PYPL) · Q3 FY2026

Read from the 10-Q for the period 2026-07-01 to 2026-09-30, filed 2026-10-27 with the SEC (accession 0001633917-26-000088): https://www.sec.gov/Archives/edgar/data/1633917/000163391726000088/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $8.6B (+10.2% on the year)
- Operating income: $1.4B (operating margin 16.3%)
- Net income: $1.1B (net margin 12.5%)
- Gross margin: not reported (the company reports expenses by nature: no cost of revenue or gross profit line exists)
- Free cash flow: $1.4B (16.7% of revenue)
- Cash conversion (operating cash flow / net income): 1.48x
- Capital expenditure: 1.9% of revenue

## Where the money goes (Q3 FY2026)

- Transaction revenues → Net revenues: $7.7B
- Revenues from other value added services → Net revenues: $873.0M
- Net revenues → Total operating expenses: $7.2B
- Total operating expenses → Technology and development: $831.0M
- Total operating expenses → Customer support and operations: $434.0M
- Total operating expenses → General and administrative: $520.0M
- Total operating expenses → Transaction expense: $4.2B
- Total operating expenses → Transaction and credit losses: $386.0M
- Total operating expenses → Sales and marketing: $508.0M
- Total operating expenses → Restructuring and other: $255.0M
- Net revenues → Operating income: $1.4B
- Operating income → Other income (expense), net: $28.0M
- Operating income → Income before income taxes: $1.4B
- Income before income taxes → Income tax expense: $301.0M
- Income before income taxes → Net income (loss): $1.1B

## Where the revenue comes from

### Products and services (REVENUE - Schedule of Disaggregation of Revenue (Details))

| Member | Value | Share |
|---|---:|---:|
| Transaction revenues | $7.7B | 89.8% |
| Revenues from other value added services | $873.0M | 10.2% |

The members sum to total revenue.

### StatementEquityComponents (OTHER FINANCIAL STATEMENT DETAILS - Schedule of Reclassifications Out of AOCI (Details))

| Member | Value | Share |
|---|---:|---:|
| Net gains (losses) on cash flow hedges—foreign exchange contracts | $23.0M | 0.3% |
| Net gains (losses) on investments | $0 | 0.0% |

The members do not sum to total revenue.

## Income statement, as filed

| Line | Q3 FY2026 | Of revenue |
|---|---:|---:|
| Net revenues | $8.6B | 100% |
| Transaction expense | $4.2B | 49.5% |
| Transaction and credit losses | $386.0M | 4.5% |
| Customer support and operations | $434.0M | 5.1% |
| Sales and marketing | $508.0M | 5.9% |
| Technology and development | $831.0M | 9.7% |
| General and administrative | $520.0M | 6.1% |
| Restructuring and other | $255.0M | 3.0% |
| **Total operating expenses** | $7.2B | 83.7% |
| **Operating income** | $1.4B | 16.3% |
| Other income (expense), net | -$28.0M | 0.3% |
| **Income before income taxes** | $1.4B | 16.0% |
| Income tax expense | $301.0M | 3.5% |
| **Net income (loss)** | $1.1B | 12.5% |
| Basic (in dollars per share) | $1 | 0.0% |
| Diluted (in dollars per share) | $1 | 0.0% |
| Basic (in shares) | 849,000,000 |  |
| Diluted (in shares) | 858,000,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2013 | $6.7B | $1.1B | $955.0M | $2.0B | $391.0M | $1.6B |
| FY2014 | $8.0B | $1.3B | $419.0M | $2.2B | $492.0M | $1.7B |
| FY2015 | $9.2B | $1.5B | $1.2B | $2.5B | $722.0M | $1.8B |
| FY2016 | $10.8B | $1.6B | $1.4B | $3.2B | $669.0M | $2.5B |
| FY2017 | $13.1B | $2.1B | $1.8B | $2.5B | $667.0M | $1.9B |
| FY2018 | $15.5B | $2.2B | $2.1B | $5.5B | $823.0M | $4.7B |
| FY2019 | $17.8B | $2.7B | $2.5B | $4.1B | $704.0M | $3.4B |
| FY2020 | $21.5B | $3.3B | $4.2B | $6.2B | $866.0M | $5.4B |
| FY2021 | $25.4B | $4.3B | $4.2B | $5.8B | $908.0M | $4.9B |
| FY2022 | $27.5B | $3.8B | $2.4B | $5.8B | $706.0M | $5.1B |
| FY2023 | $29.8B | $5.0B | $4.2B | $4.8B | $623.0M | $4.2B |
| FY2024 | $31.8B | $5.3B | $4.1B | $7.5B | $683.0M | $6.8B |
| FY2025 | $33.2B | $6.1B | $5.2B | $6.4B | $852.0M | $5.6B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +4.3% (year before +6.8%): slowing
- Operating income: +13.9% (year before +5.9%): accelerating
- Net income: +26.2% (year before -2.3%): accelerating
- Free cash flow: -17.8% (year before +60.4%): slowing

## Operating figures stated in the filing

- TPV growth: 6.0% (as of 2026-09-30). "The increase in net revenues was driven primarily by growth in total payment volume ("TPV") of 6% and favorable impact from hedging activities." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Payment transactions per active account: 60.8 transactions (as of 2026-09-30). "Number of payment transactions per active account 60.8 57.6 6 % 60.8 57.6 6 %" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Payment transactions per active account: 57.6 transactions (as of 2025-09-30). "Number of payment transactions per active account 60.8 57.6 6 % 60.8 57.6 6 %" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Share of TPV generated outside the U.S.: 35.0% (as of 2026-09-30). "Percent of TPV generated outside of the U.S. 35 % 38 % ** 35 % 37 % **" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Share of TPV generated outside the U.S.: 38.0% (as of 2025-09-30). "Percent of TPV generated outside of the U.S. 35 % 38 % ** 35 % 37 % **" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Transaction loss rate: 0.1% (as of 2026-09-30). "Transaction loss rate (1) 0.07 % 0.09 % ** ** 0.06 % 0.08 % ** **" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Transaction loss rate: 0.1% (as of 2025-09-30). "Transaction loss rate (1) 0.07 % 0.09 % ** ** 0.06 % 0.08 % ** **" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Consumer loans and interest receivable current: 96.5% (as of 2026-09-30). "Percent of consumer loans and interest receivable current 96.5 % 96.3 %" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)

## Key insights

### Restructuring charges explain more than the whole margin drop

Restructuring and other rose by 2.15 points of revenue while operating margin fell 1.73 points, so the other cost lines together took a slightly smaller share.

Restructuring and other was $255M this quarter against $69M a year earlier, 2.97% of net revenues, up 2.15 points. Operating income fell to $1.40B from $1.52B and operating margin to 16.33%, 1.73 points lower. The restructuring line alone equals 18.2% of this quarter's operating income. _(from the filing)_
The filing ties the charge mainly to a global workforce reduction meant to simplify operations "by removing organizational layers across the Company and increasing spans of control", plus smaller charges under earlier restructuring plans. The line also holds losses on loans held for sale, which appeared in the same quarter a year earlier as well. _(from the filing)_
Set the restructuring line aside and the operating margin would have been slightly wider than a year earlier: the rise in transaction expense was absorbed by lower losses and smaller support and marketing costs. The margin drop reflects a cost of reorganising, not a collapse in the core spread this quarter. _(analysis)_
The filing says it intends to reinvest a significant portion of the expected savings in its highest-priority growth initiatives, so lower headcount costs may reappear as new spending rather than as a wider margin. Both outcomes fit the plan as the filing describes it. _(analysis)_

### The fee per dollar moved fell faster than its cost

Volume grew 6% but transaction revenues only 2.51% and transaction expense 4.55%, so the spread PayPal keeps on each payment dollar narrowed.

Total payment volume grew 6%, transaction revenues 2.51% to $7.71B, and transaction expense 4.55% to $4.25B. Transaction expense now equals 55.1% of transaction revenues and 49.49% of net revenues, 1.22 points more than a year earlier. The share of volume generated outside the U.S. fell to 35% from 38%. _(from the filing)_
The filing names the reasons the fee lagged volume: "changes in product and geographic mix, higher co-marketing campaigns and incentives with large merchants, and lower foreign exchange fee revenue". On cost, it points to "a higher proportion of TPV from our Braintree products and services, which generally have higher expense rates than our other products and services". _(from the filing)_
Measured per dollar of volume, the filing reports a slightly lower transaction expense rate than a year earlier, which it attributes to favorable changes in product mix and certain third-party pricing incentives within PayPal products and services. _(from the filing)_
Revenue per dollar moved fell further than cost per dollar moved, so the spread narrowed even with cheaper funding. Processing for large merchants brings volume at a thin fee; branded checkout funded from a balance earns more. Which kind of volume grows next sets the direction of this spread. _(analysis)_

### Lower losses paid for the rise in funding costs

Transaction and credit losses fell by 1.24 points of revenue, almost exactly offsetting the 1.22-point rise in transaction expense as a share of revenue.

Transaction and credit losses fell 20.08% to $386M from $483M, to 4.5% of net revenues. The transaction loss rate fell to 0.07% of payment volume from 0.09%. Losses equalled 27.5% of operating income this quarter, against 31.8% a year earlier. _(from the filing)_
The filing credits the lower transaction losses to "lower fraud losses, benefits realized from risk mitigation strategies, and higher recoveries". Credit losses were also reduced by "the release of reserves as a result of the reclassification of certain loans and interest receivable to held for sale", tied to installment loans in Japan. _(from the filing)_
Only part of this repeats on its own. Better fraud models and recoveries can persist; a reserve release from moving loans to held for sale comes with that move. The loss rate in quarters without such a reclassification is the cleaner test. _(analysis)_
Loan quality held through the quarter: 96.5% of consumer loans and interest receivable were current at the end of the period. _(from the filing)_

### A smaller share count cushioned the fall in earnings per share

Net income fell 14.02% to $1.07B, but diluted shares dropped to 858 million from 960 million, so diluted EPS slipped only to $1.25 from $1.30.

Net income was $1.07B against $1.25B a year earlier, 86.0% of the prior level. Diluted earnings per share were $1.25 against $1.30, 96.2% of the prior level, because the diluted share count fell to 858 million from 960 million. The filing reports open-market repurchases under its stock repurchase program through the period. _(from the filing)_
Below operating income, two lines widened the fall. Other income (expense) moved to a net expense of $28M from income of $13M, which the filing attributes to higher interest expense on newly issued debt and losses on strategic investments. Income tax expense rose to $301M from $285M. _(from the filing)_
Cash generation stayed ahead of reported profit: operating cash flow was $1.59B, 1.48 times net income, and free cash flow $1.43B, 16.67% of revenue. Operating cash flow was still lower than the $1.97B of the same quarter a year earlier. _(from the filing)_
Per-share results and company results tell different stories this quarter. Repurchases spread a smaller profit over fewer shares; the business-level test remains operating income and the spread earned on payment volume. _(analysis)_

### Competitive edge

- **Accounts pay more often, not just more accounts** Payment transactions per active account rose to 60.8 from 57.6, so growth comes from existing users transacting more across a two-sided network.
- **A payments network that needs little capital** Capital spending was 1.88% of revenue, leaving free cash flow of $1.43B, 89.9% of operating cash flow and 16.67% of revenue.
- **Scale has widened the operating margin over eight years** Annual revenue rose from $15.45B to $33.17B and operating income from $2.19B to $6.07B, lifting operating margin from 14.2% to 18.3%.

### What to watch

- **The largest cost is set by card networks and banks** Transaction expense of $4.25B equals 49.49% of revenue and 303% of operating income, and it is paid to networks, banks and processors PayPal does not control.
- **Fraud and protection losses remain a large share of profit** Even after a 20.08% fall, transaction and credit losses of $386M equal 27.5% of operating income, and the filing expects fraud attempts to continue.
- **A known brand under many regulators draws attacks and scrutiny** The filing says hostile actors may target PayPal for its name and data, and that one event could prompt overlapping investigations across jurisdictions.

## Investor view

**Payment volume grew 6%, but PayPal kept less of each dollar it moved**

### How it makes money

PayPal earns most of its money as a fee on each payment it completes. Transaction revenues were $7.71B of $8.58B in net revenues this quarter, 89.8% of the total. The fee is charged on payment volume, with extra revenue when PayPal converts currency, handles a cross-border payment, or moves money instantly from a PayPal or Venmo account to a bank or debit card. _(from the filing)_
The other $873M, 10.2% of revenue, comes from other value added services: partnerships, referral and subscription fees, gateway fees, interest and fees on the loans PayPal holds, and interest earned on assets underlying customer balances. _(from the filing)_
The largest cost is transaction expense, what PayPal pays card networks, banks and processors to fund each payment: $4.25B, 49.5% of revenue. How a payment is funded sets that cost. In the filing's words, "The cost of funding a transaction with a credit or debit card is generally higher than the cost of funding a transaction from a bank or through internal sources such as a PayPal or Venmo account balance or our consumer credit products." _(from the filing)_
The model needs little physical capital. Capital spending was 1.9% of revenue this quarter, and free cash flow was $1.43B, 16.7% of revenue. Over the longer run, annual revenue grew from $15.45B to $33.17B across the eight years of history, and operating income from $2.19B to $6.07B. _(from the filing)_
Read together, the business is a spread: a fee on the value moved, less the cost of funding it and the losses on payments that go wrong. The fee depends on which product carries the payment and where; the cost depends on whether the money comes from a card, a bank or a PayPal balance. Most of what changes the margin happens inside that spread, not in the overhead lines below it. _(analysis)_

### What shifted

Net revenues rose 1.98% to $8.58B from $8.42B, while total payment volume grew 6%. Transaction revenues grew 2.51%. The filing gives the reason the fee lagged the volume: "changes in product and geographic mix, higher co-marketing campaigns and incentives with large merchants, and lower foreign exchange fee revenue". The share of volume generated outside the U.S. fell to 35% from 38%. _(from the filing)_
Transaction expense rose 4.55% to $4.25B from $4.06B, faster than transaction revenues, and reached 49.5% of revenue, 1.22 points more than a year earlier. The filing attributes the increase to volume growth and "a higher proportion of TPV from our Braintree products and services, which generally have higher expense rates than our other products and services". _(from the filing)_
Transaction and credit losses fell 20.1% to $386M from $483M, down to 4.5% of revenue, 1.24 points less. The transaction loss rate dropped to 0.07% of volume from 0.09%, which the filing credits to "lower fraud losses, benefits realized from risk mitigation strategies, and higher recoveries". Credit losses were also helped by "the release of reserves as a result of the reclassification of certain loans and interest receivable to held for sale". _(from the filing)_
Restructuring and other rose to $255M from $69M, a swing larger than the whole fall in operating income, from $1,520M to $1,402M. The charge comes mainly from a global workforce reduction aimed at "removing organizational layers across the Company and increasing spans of control", plus losses on loans held for sale. Operating margin was 16.3%, 1.73 points lower than a year earlier. _(from the filing)_
Net income fell 14.0% to $1.07B from $1.25B. Other income (expense) turned to a net expense of $28M from income of $13M, and income tax expense rose to $301M from $285M. Diluted earnings per share fell less, to $1.25 from $1.30, because the diluted share count dropped to 858 million from 960 million. Operating cash flow was $1.59B, against $1.97B in the same quarter a year earlier. _(from the filing)_

### Risks in the filing

Cybersecurity. The company says attacks are growing more sophisticated, including threats enabled by artificial intelligence, and that hostile actors "may target PayPal due to our name, brand recognition, types of data" its customers provide. It has had breaches involving customer information before, and a breach could bring fines, remediation costs, card-network liability and lost customer trust. _(from the filing)_
Regulation. PayPal operates under overlapping and changing rules on money transmission, lending, privacy, anti-money laundering, sanctions and consumer protection in many countries. A single event could prompt investigations in several jurisdictions at once. Its crypto and PayPal USD stablecoin products add their own rules, and depend on third-party custodians and an outside issuer whose failure could cause customer losses. _(from the filing)_
Fraud and protection programs. Fraudsters use stolen or synthetic identities and account takeovers, at a scale digital payments make possible. "We incur substantial losses from our protection programs as a result of disputes filed by our customers." If a merchant that sells goods in advance fails, PayPal can be liable to the buyers. _(from the filing)_
Dependence on others and on the economy. PayPal relies on card networks, banks, processors, partner lenders and cloud providers it does not control. Weaker economic conditions, tariffs and trade tensions could reduce the number and size of transactions, raise credit losses and move exchange rates against it. _(from the filing)_
Of these, the numbers this quarter show the fraud risk moving the right way and no sign yet of economic stress in losses or loan quality. What they do show is the effect of the company's reliance on card networks and processors: the cost of funding payments is the line that grew faster than revenue. _(analysis)_

## Founder view: mechanisms

### Fees on a two-sided network

PayPal sits between consumers who hold an account and merchants who show its button at checkout. Each side is worth more because the other is already there. Once both are signed up, each extra payment costs little to win, and the company earns a fee on its value. Revenue follows how often accounts pay, not how many new accounts arrive. _(analysis)_

### Volume bought at a thinner margin

Not all volume is equal. Branded checkout, where the consumer pays from a PayPal account, earns a higher fee and can be funded cheaply. Processing for large merchants, where PayPal handles card payments behind the merchant's own checkout, brings much more volume but a thinner fee and a higher funding cost. Growth that leans on the second kind lifts volume faster than profit. _(analysis)_

### Loss control is a margin line

In payments, fraud, disputes and bad loans are a running cost, not an accident. PayPal controls it with risk models, recoveries from sellers who break its terms, and underwriting on its credit products. Every reduction in losses goes straight to operating income, so risk work is as much a source of margin as pricing. _(analysis)_

### Balances and credit, sold forward

Money customers leave in their accounts earns interest for PayPal, and credit offered at checkout earns interest and fees while making purchases easier. PayPal sells many of the loans it originates to outside investors under forward flow arrangements, so it keeps the customer relationship and part of the economics while others fund much of the balance. _(analysis)_

## Member research

Signed-in members read, on the page: what PayPal's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- PayPal 10-Q for the period to 2026-09-30: https://www.sec.gov/Archives/edgar/data/1633917/000163391726000088/ (2026-10-27)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02