Payment vendors PayPal Holdings Inc. and Block Inc. are in a challenging environment in 2023.

146 retailers in Digital Commerce 360’s Top 1000 use PayPal for payment processing, more than any other vendor. 21 retailers use it for payment security and fraud prevention. The Top 1000 is Digital Commerce 360’s ranking of the largest ecommerce retailers in North America by sales.

PayPal says losses are temporary

PayPal shares slumped in the second quarter as the company set aside more money to cover souring loans it has made to merchants.

PayPal’s adjusted operating margin narrowed to 21.4% in the second quarter. That’s down from 22.7% in the first three months of the year, the company said in a statement. That missed the 22% guidance the company had previously provided.

“We saw some increased losses in our PayPal business-loan portfolio,” chief executive officer Dan Schulman said in a telephone interview. “We tightened on originations and we’re seeing the effects of that in the quarter. I expect that to be a temporary blip across results.”

In recent years, PayPal expanded its loan offerings for the millions of merchants that process payments across the firm’s many platforms. The company offers business and working-capital loans. The business loans can be as small as $5,000 and as big as $150,000 for repeat borrowers.

The results echo those of American Express Co., which last month said it’s begun to see softness in its portfolio of cards dedicated to U..S small business. The Federal Reserve said that a “significant” share of banks reported having tightened standards on loans to small businesses in the second quarter.

Spending is up, but investors are concerned

Spending growth on PayPal’s platforms accelerated in the second quarter, meanwhile, as consumer confidence continues to soar amid moderating inflation.

Total payments volume rose 11% to $376.5 billion. That’s higher than the $372 billion average of analyst estimates compiled by Bloomberg and faster than the 10% growth the company posted in the first three months of the year.

PayPal has benefited from the ongoing strength of U.S. consumers and their increased willingness to travel and spend more on experiences in the aftermath of the pandemic. Consumer confidence advanced to a two-year high in July, aided by a strong job market and easing inflation.

“Ecommerce seems to be bouncing back as inflation cools,” Schulman said. “You’re seeing a return in discretionary spend.”

PayPal’s increased provisions come as investors have grown increasingly concerned about pressure on margins. That’s because the company continues to invest in its unbranded-payments technology. Shareholders fear that business is less lucrative than the branded PayPal checkout experience.

That pressure seemed to continue in the second quarter: Volume through PayPal’s branded checkout options climbed by a percentage in the “mid-single digits,” compared with 11% growth for the company overall. In the quarter, PayPal saw its transaction margin — a measure of how profitable the firm’s core business of processing transactions is — shrink to 45.9%, marking the third consecutive quarter that metric narrowed.

“We understand that over the medium to long term, we need to deliver growth in our transaction-margin dollars to ensure we sustainably grow our earnings,” Schulman said on the conference call.

Block raised its forecast, but investors seem unsure

Block Inc., Jack Dorsey’s payments company, tumbled as much as 14% after reporting results that fell short of some analysts’ expectations.

Jefferies Financial Group Inc.’s Trevor Williams said in a note that Block’s earnings report “lacks oomph.” That’s even after the company increased its adjusted profit outlook for the rest of the year. BTIG LLC analyst Lance Jessurun called Block’s July trends “disappointing.”

Williams cited limited upside for Block’s Cash App, which started as a person-to-person payments app and now offers access to a variety of financial products. He also called “tepid” one measure of how many dollars are processed by Block’s payments systems.

Both Cash App and Square, a payments platform geared toward small and midsize businesses, beat expectations in the second-quarter.

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