PayPal History, Not Credit History, Fuels New Loan Product

PayPal has launched PayPal Working Capital, a credit offering that merchants can apply for based on their PayPal transaction history instead of their credit history.

Instead of charging interest, PayPal asks for a fixed fee. Merchants repay the loan based on a percentage of the daily sales they receive through their PayPal accounts —if a merchant has no revenue on a given day, the merchant does not need to make a payment. The loan, from WebBank, has no interest charges, late fees or pre-payment fees.

"It's about solving these seller's needs and pain points, [because] of course we want a strong merchant network,"  says Darrell Esch, PayPal's vice president and general manager of SMB lending. "We would expect that, ultimately, this translates into things like stronger, deeper relationships."

The Working Capital service is initially only being offered to roughly 90,000 existing PayPal merchants that have been using the PayPal for at least three months, says Esch. In most cases, merchants who receive a Working Capital loan have been PayPal customers for years.

"With this announcement, PayPal expands into the realms of Kabbage and On Deck Capital, as well as obviously traditional small business lending offered by banks and credit unions," says Nick Holland, a senior payments analyst at Javelin Strategy & Research. "FI's should be scared – PayPal has the audacity of a startup with an R&D budget that outguns the incumbents."

PayPal's promise of immediate access to funds is a unique feature that could 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 says. It "gives PayPal a chance to validate their risk assessments and their own revenue projections."

Indeed, PayPal is using internal data in order 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.  "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 payments—something which more traditional merchant advance providers do not have."

A longer version of this story will appear on Bank Technology News.