PayPal has already been working with consumers and small businesses to provide more than $200 million in loans and now it plans to expand into the alternative lending market, Irish Times reported.
“It’s just scratching the surface of what we see as the opportunity there,” Steve Allocca, Paypal’s head of credit told Irish Times. "This has never been a space that’s been particularly well served by banks or traditional lenders.”
This move would put the payment processor against startups like Lending Club and OnDeck, but according to the article: "PayPal’s lending program is far more modest than market leaders," and that "executives say they are putting more effort behind the program and it could prove critical as the company spins off next year from parent eBay, to compete in an increasingly crowded payments-processing industry."
PayPal wants to be part of the growing non-bank lending trend. After all, P2P group Lending Club has helped third-party investors make more than $6 billion in loans and the company was valued at $8.9 billion after its IPO last week. PayPal has been in the merchant lending business since September 2014 and has made more than 35,000 loans that have a cap of $60,000.
Merchants have caught onto PayPal's loans concept because of the fixed fee option that eliminates potentially high interest rates. The flat-fee structure allows merchants to repay the loan using some of the sales instead of having a structured timeline like a bank loan. PayPal joining the alternative lending market could pose threats to banks, said one analyst.
“They do have a pretty strong brand, a decent critical mass of users, and if they can bridge that with a little bit better tech they could be very powerful, Sanjay Sakhrani, analyst with brokerage Keefe, Bruyette & Woods, told Irish Times.
PayPal's alternative lending structure differs from Lending Club because PayPayl doe not profit from lending itself, the article said. PayPal is looking to the alternative lending business as a way to attract merchants and consumers to use its services over other payment processors. PayPal is attempting to stay relevant against players like Apple who looked to Stripe, instead of PayPal, to partner in the launch of Apple Pay. Convincing consumers and merchants to use their credit business would save PayPal transaction fees it has to pay card companies that don't exist when consumers use PayPal's credit.