December 17, 2014
PayPal is looking to add lending facilities to its already wide service portfolio. Perhaps not coincidently, the lending market is witnessing success stories from startups like Lending Club. PayPal has already advanced loans worth $200M to consumers and small businesses. As PayPal spins off from its parent company eBay, the company considers the lending program a crucial component of its strategy as the company competes in the crowded payments industry.
Non-bank lending has grown in the past few years with traditional banks retracting from the space, paving way for startups with new and improved business models. Lending Club has already helped its investors gain around 100 times return. PayPal’s merchant lending program was launched last September. Since then, the company has issued around 35,000 loans with the maximum cap on loans at $60,000.
Under PayPal’s lending program, merchants are required to pay a fixed fee rather than interest on the loan amount. PayPal leverages its database of merchants’ financial information in order to calculate the risks involved in allocating loans. The company then collects the loan amount from the sales that it processes for the merchants. Programs from companies like PayPal are becoming a concern for bankers now as they being bypassed in their core competency by such technology players.
Apart from merchants, PayPal runs a lending program for consumers as well. Earlier this year, PayPal had announced that it would buy an outstanding loan portfolio from GE Capital worth $1B. As part of the loan portfolio, PayPal offers a credit card. When shoppers link their existing credit cards to a PayPal account, PayPal is required to pay fees to card companies when a payment is made via PayPal. However, this is not the case when consumers use the credit card issued by PayPal itself.
Unlike other lenders, PayPal is offering the lending service as an additional incentive for merchants and consumers to use PayPal, thus gaining an edge over other payment processors. PayPal is sure to face more challenges as it spins off from eBay and it would need to be profitable and sustainable on its own. The company clearly needs to continue to innovate in areas such as mobile commerce while other tech giants like Apple have also entered the payments space. It should be noted that Apple has partnered with PayPal’s rival Stripe for its Apple Pay service.
PayPal is clearly expecting a lot from the lending space and considering its past experience in payments, the company might end up in a leadership position in such specialized payments areas.