EBay's Apple, Square pacts could strangle community banks

With just two partnerships, eBay is cutting off a big opportunity for community banks.

EBay on Tuesday announced it would support Apple Pay on its marketplace platform starting this fall. At the same time, eBay said it will soon begin lending up to $100,000 to its sellers via a partnership with Square Capital, the mobile point of sale company's small and midsize business financing arm.

While seemingly separate, these partnerships provide a single route to cement eBay's relationships with small businesses that sell on its platform, providing a new way to receive payments and receive financing while cutting banks out of the picture.

Daniel Acker/Bloomberg

"EBay needs simplified one-touch payments, and Apple Pay gives them that," said Richard Crone, a payments consultant. "When you add a payment type like Apple Pay, you reduce abandonment rates, and eBay is looking for conversions."

Adding a capital or lending option that's linked to the payment gives eBay a forward-looking view into the sales of micro merchants. These payments are the basis of the credit, providing the data to underwrite and approve the lending, as well as the loan payback, as merchant credit is usually based on a percentage of future payments.

By teaming with Square, eBay gets back some of that insight into merchant transaction histories and projections that would otherwise be lost as eBay's unwinds its relationship with PayPal, which offers a similar lending product. By working with eBay, Square gets a partner that dramatically raises its profile for e-commerce sales.

This new revenue source will be a potential drain for community banks, which provide a majority of the small-business loans in the U.S. While banks don't heavily serve micro merchants, community banks have a potential path to that market that eBay is intercepting.

The deals make eBay a tough opponent for community banks to beat in a mobile-driven world where small businesses are already operating digitally and visiting branches less often. Merchants that sell on eBay may not choose to visit a bank to get a loan if such an option is available via the platform they already use.

"Bankers should take note of this, especially community banks," Crone said. "These micromerchants are community-based."

eBay says it will provide capital to a subset of the small-business market that's underserved by traditional financial services, citing Federal Reserve research that found 70% of small businesses don't receive the funding they want. Square Capital has lent almost $3 billion to 180,000 merchants in the past four years, and began taking on partners in 2016. Its loans range from $500 to $100,000.

EBay's moves also put pressure on traditional processors.

Most community banks don't have their own merchant acquiring operations, so they rely on processors, which are suffering at the hands of smaller, more nimble fintechs. EBay's deals with Square and Apple usurp an opportunity for these processors.

"What's interesting is we're not seeing the processors that represent these community banks doing the same kind of deal on the small businesses' behalf, like eBay is doing," Crone said.

EBay would not provide an attributed comment. In an email, eBay's public relations office said: "Access to capital is one of the biggest hurdles in making business growth a reality … eBay is deeply committed to being a partner to sellers and helping them grow their business, and our agreement with Square Capital is a great example of how we are helping our sellers succeed by offering them fast and easy access to funding."

EBay's deal with Square also opens a new front in Square and Apple Pay's rivalry with PayPal.

EBay is gradually severing its ties with PayPal following the two companies' separation three years ago. That corporate relationship includes other partnerships that lingered beyond the separation, including PayPal providing capital to eBay sellers.

PayPal will remain a payment option on eBay until 2023. That hasn't stopped eBay from severing some aspects of its PayPal relationship, such as moving its processing to Adyen and competing with PayPal in other areas. EBay has not directly offered funding to its sellers since eBay and PayPal separated in 2015, though eBay's sellers have had access to PayPal Working Capital and solutions from other financing partners, which are independent of eBay, an eBay spokesperson said in an email.

"PayPal and Square compete with each other on multiple fronts, including the provision of working capital loans to small-business loans," said Rick Oglesby, founder and president of AZ Payments Group. "EBay sellers have access to these services through PayPal, so the partnership between eBay and Square furthers the separation between PayPal and eBay."