PayPal takes $85m slice of SME lending pie

Michael Bennet
JULY 8, 2016
THE AUSTRALIAN
PayPal’s Darrell Esch sees the program as ‘a membership, value-added play’
It’s only available to customers and has had little fanfare, but PayPal has quietly written $85 million of small business loans in less than two years.
“I’ve really never seen anything be embraced by customers (like this),” Darrell Esch, a former banker and PayPal’s global ­general manager of small and ­medium business lending told The Australian.
According to figures released by the payments giant, PayPal Working Capital has extended more than $85m to about 3000 small businesses since launching in Australia in late 2014.
In contrast, Prospa — the biggest “fintech” online small business lender — in May revealed it had cracked the $150m mark after four years of operations.
SocietyOne, the biggest “marketplace” lender, which has also been in business for four years, pushed through $100m personal loans in April.
Mr Esch said PayPal, which began in 1998 before being gobbled up by eBay in 2002, was ­nicely positioned between the horde of start-ups targeting the ­financial services industry and ­incumbent banks.
PayPal’s product is also different, with the unsecured loan of up to $97,000 being offered only to merchants that use its payments network, so sales funds can be ­instantly distributed following a five-minute application.
There’s a one-off upfront fee and repayments come out of daily sales, typically between 10 per cent and 30 per cent of turnover.
Interest rates are typically in the “teens and 20 per cent” range, differing based on merchants’ repayment choices and risk.
When PayPal launched lending in Australia, Macquarie analysts warned the banks faced threats from “companies who understood their customers better than they do”.
“This program was started as a little start-up … but with the benefit of strong capital in our parent, as well as our ability to leverage all the pockets of expertise.
“It was sort of the best of both worlds — the ability to act like a crappy start-up inside of a big company,” Mr Esch said.
Including the US and Britain, PayPal Working Capital recently surpassed $US2 billion ($2.6bn) in loans. While Australia makes up a small piece of the pie, Mr Esch said the business was profitable, while declining to give any internal targets.
According to accounts filed with the corporate regulator for the year to December 31, PayPal Credit increased profit almost fourfold to $120,143 on $3.7m of revenue. But Mr Esch said profits weren’t the main motivation, citing how providing customers with more capital — typically for inventory — boosted sales and loyalty. The most prolific borrowers from PayPal in Australia include businesses in fashion, automotive parts, electronics, sports equipment, toys and jewellery.
“It creates the effect of growth in the network and we also see that once merchants take this program, their attrition from PayPal is cut in half. So we’ve really done it as a membership, value-added play,” Mr Esch said.
Phoebe Yu, chief of Melbourne online homewares company Ettitude, is a repeat user and in May borrowed $39,000 from PayPal. While she banks with Commonwealth Bank and was aware of fintech operators, she stuck with PayPal because it’s quick, easy and didn’t require her home as security. “To get a business loan from a bank there’s a lot of applications you need to do, a lot of credit checks, and also I don’t think the (interest) rate is very competitive,” she said.
As capital regulations tightened, Mr Esch said banks had increasingly focused on large commercial clients and stepped back from transactions under $100,000, as they weren’t cost effective. He said PayPal had a competitive advantage over start-ups from being in business almost 20 years and strong risk management capabilities.
“Some of the scrutiny that’s come about the alternative lending space in the US and around the world is really centring on what you offer as marketplace lending,” he said.