PayPal has filed an application for a bank charter to expand and strengthen its lending services to small businesses. The application has been submitted to the Utah Department of Financial Institutions and the FDIC to establish PayPal Bank, which would be chartered in Utah.
To date, PayPal has extended more than $30 billion in loans across roughly 420,000 small business accounts worldwide. To be eligible for these loans, businesses are required to have a PayPal Business account. Historically, however, all lending has been facilitated through third-party banks. While PayPal originated the loans and managed the customer relationship, the actual lending has been conducted by traditional financial institutions such as Wells Fargo, JPMorgan Chase, and Goldman Sachs.
A Lifeline for Small Business
PayPal’s lending practice has long focused on the lower end of the small business market. The minimum revenue requirement for a PayPal Business Loan is $33,300, while the PayPal Working Capital Loan has a minimum of $1,000. According to figures compiled by TechRepublic, nearly 70% of PayPal’s small business loans in 2022 went to low- and middle-income areas.
The company has also concentrated on areas largely abandoned by traditional banks. More than half of their loan value between 2017 and 2022 went to zip codes where 10 or more bank branches had closed, per TechRepublic.
“The overwhelming majority of small business lending is done by non-banks today as a form of factoring on card payments,” said Don Apgar, Director of Merchant Services at Javelin Strategy & Research. “PayPal has visibility into the daily volume of card payments processed by a merchant customer, so it can offer a reasonable loan that is repaid daily as a percentage of card payments from customers. By tying repayment to daily cash flow, the business will never be cash strapped due to a large fixed loan payment during a slow period.”
What’s in it for PayPal?
If the charter is approved, PayPal would expand beyond small business lending to provide interest-bearing savings accounts to its customers as well.
“The question for PayPal is what advantages they expect to get by chartering a bank except for additional compliance requirements,” said Apgar. “A bank charter would enable them to offer bank accounts to these small business customers and expand into other embedded finance products. But that approach didn’t work out for them on the consumer side, and led to the departure of CEO Dan Schulman, who had championed building a complete suite of financial products for consumers on top of their PayPal accounts.”
