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As financial services startups debate whether it is better to ask regulators for permission or beg for their forgiveness after acquiring customers, PayPals history might offer some lessons.
August 6
PayPal is offering small businesses that already transact over its network another reason to stick with the digital payment network working capital. That's right, PayPal is making loans.
The digital commerce arm of eBay is giving its merchants relatively
That means no minimum monthly payments. ("If you have no sales on a particular day, you owe no payments for that day," said Darrell Esch, PayPal's vice president and general manager of the company's newly created small business lending group, in a
The
"It's about solving these sellers' needs and pain points, [because] of course we want a strong merchant network," he says. "We would expect that, ultimately, this translates into things like stronger, deeper relationships."
It's a scary prospect for banks that have traditionally looked at PayPal as a frenemy.
"With this announcement, PayPal expands into the realms of Kabbage and On Deck Capital, as well as obviously
Others agree.
"This could be a huge disruptor," says Jim Marous, a senior vice president of corporate development at digital direct marketing agency New Control and author of the
"Especially for the smaller retailer that is the target market of PayPal."
He goes on to explain that the immediate access to cash (PayPal claims the money is disbursed within minutes to a merchant's account) and transparency on the rates and fees associated with the loan are a big draw.
In fact, that's a unique feature that could help propel the popularity of the product, says Christine Pratt, a senior analyst at the Aite Group.
When asked if she's seen anything thing like the rates and borrowing structure PayPal is now offering, she said she had not. "This is one of the reasons that I think this is a pilot and by invitation only," Pratt adds. It "gives PayPal a chance to validate their risk assessments and their own revenue projections."
Indeed, PayPal is using internal data to assess how much to offer and to whom. That, Pratt says, is a strength.
"One of the biggest problems for banks lending to small businesses is that there is very little financial data available and banks are reluctant to lend to e-commerce merchants without a physical presence," she says. "Online merchants have been hard hit as well by the lack of [home equity line of credit] and mortgage refinancing to fund their working capital needs in particular PayPal has the access to a significant amount of financial data on these business customers as well as access to their PayPal accounts to retrieve paymentssomething more traditional merchant advance providers do not have."
PayPal is working with the same bank that backs its BillMeLater service, WebBank. Executives declined to discuss the development of the product, or how long PayPal has been thinking about or working on this type of loans.