PayPal eyes industrial loan charter

• Key insights: PayPal submitted applications to the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation to create PayPal Bank. 
• What's at stake: Payment companies and neobanks are increasingly looking toward banking charters to lower the payment processing costs and gain access to consumer deposits and small-dollar loans. 
• Forward look: Regulators have been handing out banking charters; the Office of the Comptroller of the Currency last week approved national trust charters for five crypto companies. 

PayPal wants to be a bank, too. 

The payments company on Monday submitted applications to the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation for an industrial loan charter to create PayPal Bank. 

The charter will make it easier for PayPal to lend to businesses, the company said. PayPal has originated more than $30 million in loans to more than 420,000 businesses across the globe since 2013.  

"Securing capital remains a significant hurdle for small businesses striving to grow and scale," said Alex Chriss, president and CEO of PayPal, in a statement. 

PayPal Bank also plans to offer interest-bearing savings accounts that would be insured through the FDIC to customers in addition to expanded lending, and would seek direct membership with the card networks in the U.S. that would "complement processing and settlement activities through existing banking relationships," PayPal said. Goldman Sachs, Wells Fargo and JPMorganChase are PayPal's program banks. 

If the charter is approved, Mara McNeill will serve as president of the newly created bank. McNeill has spent more than 25 years in financial services, most recently as president and CEO of Toyota Financial Savings Bank, an FDIC industrial bank that provides banking services to franchised Toyota and Lexus dealerships, their team members and their families. 

Payment companies have been seeking ways to reduce their reliance on partner banks through establishing industrial loan banks because they offer a unique regulatory pathway to offer banking services without becoming a full-fledged bank and subject to the Bank Holding Company Act, Chad Polen, a partner in KPMG's financial services regulatory practice, told American Banker.  

Square Financial Services, Block's banking subsidiary, secured its ILC earlier this year, which it has touted as a windfall for the company. Stripe's stablecoin company Bridge is also looking to get a national trust charter.

"This charter allows the ability to accept deposits and extend credit directly, creating a more integrated financial ecosystem for their customers," Polen said. 

It also reduces costs, Gary Stein, a managing director in Accenture's North America payments practice, told American Banker. 

Access to FDIC-insured deposits and the Federal Reserve's discount window gives ILCs the ability to fund assets, such as loans, at a lower liability cost and do so at scale, Stein said. Access to the Fed's payment system lets them offer payment services directly without going through a third-party banking-as-a-service sponsor bank and export interest rates across state lines regardless of state usury laws. 

"For payments companies that currently offer services through sponsor banks, ILCs could eliminate the cost of having to pay for that sponsorship," Stein said. 

This isn't PayPal's first attempt to nab a bank charter. In 2019, PayPal, Google and dozens of other fintechs were in talks with the OCC about a charter, but ended up walking away. 

Banking charters are all the rage these days. The OCC late last week granted national trust charters to five crypto companies, including Circle, Ripple and Paxos. Fintechs have also been buying up banks in an effort to acquire the highly coveted charters.