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EBay Inc. wants to lend you money.
The online marketplace is stepping into the gap that has opened as commercial banks have become reluctant to lend to small-business owners by beefing up its offer of lines of credit to users of its PayPal service.
“They are going from a technology company to a financial services company,” said Gil Luria, analyst at financial services and investment firm WedBush.
EBay’s EBAY +1.01% PayPal, which it bought in 2002, has had an invitation only pilot program for small business credit since last fall, but it recently launched the offer more broadly under the name PayPal Working Capital.
The service offers small business customers lines of credit that can be made available online for a fee and a fixed payment plan connected to sales. So far, it’s funded more than $150 million in loans to 20,000 U.S. businesses, the company says. The next stage is to expand in the U.K. and Australia.
“They have relationships with millions of small business and 150 million consumers online,” said Luria. “Adding credit is a natural next step.”
How does it work?
Current small business customers of PayPal can apply online for lines of credit that range from $5,000 to $60,000. Each loan has a fixed fee and the small business borrower must choose how quickly to pay back the loan, which is done incrementally as it make sales.
“It’s an advance on future receivables,” said Jordan McKee, senior analyst , mobile payments at 451 Research, which tracks innovation in enterprise IT.
While PayPal did not give any specific numbers on the fixed fee, it’s understood to range from 7% to 15% depending on the business and the loan.
“PayPal will target the businesses that need credit and businesses that will likely pay it back,” said Luria.
The company is moving into a space vacated by banks, which have scaled back small-business lending since the financial crisis.
PayPal says 60% of the current PayPal Working Capital customers are already users of eBay. The remaining 40% are pure PayPal customers, so it’s easy for the company to track sales and other relevant information before offering them a line of credit.
Some experts have expressed concern that the fixed fee for the loan could be high.
This sort of online lending doesn’t claim the most illustrious history, and merchants that use this tend to do so for a last-ditch deal, said McKee.
“What PayPal is offering is that you get the money right away,” said the analyst.
Still, PayPal does a good job at being transparent about the process, he said. Customers can check online at any time on how much they are paying towards the line of credit.
The consumer approach
PayPal has also recently relaunched its PayPal Credit platform, formerly known as Bill Me Later, which offers consumers credit online. That service has grown 30% to 40% a year since it was first introduced when PayPal bought Bill Me Later in 2008, according to analysts.
The product works like a debit card, drawing on a line of credit with PayPal, and allows customers to make in-store payments using an app on their phone.
PayPal has an advantage over credit card companies, which only have access to credit scores when deciding to extend credit to a customer, according to analysts. The company can use its own information, which includes buying patterns, data on whether payments are made on time and feedback ratings from EBay to make its decisions.
The use of online credit has grown 15% a year for EBay, said Wedbush’ Luria.
“They have better information than credit card companies, so they can provide more targeted, less risky loans,” said Luria.
PayPal uses Web Bank, based in Salt Lake City, UT, to provide the financing for the loan but manages the actual loan in-house.
One challenge for PayPal is loyalty, said analysts.
PayPal will have to offer discount or reward points to convert new customers, just as Target gives customers discounts or American Express offers reward points, said Kenneth Sena, research analyst at Evercore Partners.
“Maybe PayPal will offer a concierge service down the road,” said Sena.
Regulation may be another issue. The eBay/PayPal products currently fall outside of conventional regulation. EBay is not a financial company and is not regulated by the Federal Reserve. However, the company did reveal last year that its loan program was the subject of a probe by the Consumer Financial Protection Bureau (CFPB) .
The CFPB was formed after the financial crisis to protect consumers and banks and non-banks come under its supervision. The CFPB did not return calls regarding eBay’s lending program.
“They are walking a fine line because they are providing consumer credit and small business credit, but trying not to own a bank,” said Luria.
The risk for eBay is that the Fed may decide at a later date to regulate the company, said the analyst.
“Nobody wants to be regulated by the Fed, nobody,” said Luria. “Getting regulated by Fed is extremely onerous and expensive and that is the risk for this credit business.”
EBay wants to lend you money - MarketWatch
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