Looking for a business loan? PayPal wants to help
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Looking for a business loan? PayPal wants to help

Here’s a takeaway you might have missed from online payment giant PayPal’s third-quarter earnings report: the company now considers itself among the top five small business lenders in the U.S.! PayPal’s not alone in making this move – other Big Tech players (notably Amazon) have also expanded into business finance. And these businesses have one thing in common that might give them an edge over banks: data.

PayPal’s share price has appreciated by 10% so far this year

graph 2811 paypal

Source: Yahoo Finance

Companies like PayPal and Amazon can keep costs low and have the ability to access transactions data that goes back over an account’s entire life-to-date – that could be months, but it’s probably years. That data is a practical alternative to using credit scores that provides a clear picture of a person’s financial past, and it’s what these companies use to determine whether or not they’re willing to lend.

Experts and regulators worry that there is an underlying risk in this sector that could leave these companies and the businesses they lend to vulnerable in the event of a sudden economic downturn. But in a sense, that’s exactly what’s letting PayPal et al. clean up. Smaller businesses, left behind by banks following the financial crisis, and without access to traditional routes to credit, are flocking to the service. There is no shortage of them: according to the Federal Reserve’s Small Business Credit Survey, as much as 70% of merchants didn’t get the funding they wanted last year.

PayPal’s vice president and commercial officer of global credit, Darrell Esch, said: “If you look at the great recession what you've seen is a bounce back of commercial lending but lending to small businesses really hasn't come back. A lot is attributed to the cost to underwriting.” This difference is significant – tech companies are leaner than banks by their very nature, and thereby able to offer regular loans that are so small (just a few thousand dollars) that they wouldn’t be worth a bank’s time. Esch continued: “Disruptive is the wrong word. There's an imbalance of supply and demand. It's not a case where we've gone and stolen banks' business. It's not about competition with the banks.” That fact might be a comfort for banks.

Esch added: “The surprise for me is how high up the demand goes for these loans. I would have thought they would have been comfortably served by traditional system, yet a lot of business owners coming to us have sales in the multi-million dollar range.”

Dominion holds PayPal and Amazon in its Global Trends Ecommerce Fund.

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