Earlier this month, we wrote about OnDeck’s parent company acquiring a bank — a move that quietly revealed something important about the future of small business lending: fintech lenders are no longer trying to compete with banks. They’re trying to become them.
PayPal’s latest move fits squarely into that same pattern.
In mid-December, PayPal applied to create PayPal Bank, a Utah-chartered industrial bank focused on small business lending and FDIC-insured savings accounts. On the surface, it sounds incremental. Another fintech adds “Bank” to the nameplate.
In reality, as a thoughtful Forbes analysis explains, it’s a structural shift with real implications for SMB borrowers — provided you understand what actually changes, and what doesn’t.
PayPal Has Been an SMB Lender for a Long Time
Before talking about “PayPal Bank,” it’s important to be clear about where PayPal already sits in the SMB lending ecosystem.
PayPal has been originating small business loans and advances since 2013, funding tens of billions of dollars to hundreds of thousands of businesses globally. In the U.S., those products have included:
- PayPal Working Capital – sales-based repayment with a fixed fee
- PayPal Business Loan / LoanBuilder – fixed-term loans with weekly payments
Until now, these loans have technically been originated by a partner bank (most notably WebBank), with PayPal controlling distribution, underwriting logic, servicing, and then purchasing the receivables.
That “bank-by-partnership” model is common across fintech lending — and it’s exactly what PayPal is now trying to move beyond.
What PayPal Bank Would Actually Change
If approved, PayPal Bank would allow PayPal to move to direct balance-sheet lending.
Practically, that means PayPal could:
- Fund loans using its own FDIC-insured deposits
- Reduce reliance on third-party sponsor banks
- Lower its internal cost of capital
- Capture more net interest margin
- Integrate payments, deposits, and credit even more tightly
This isn’t cosmetic. It’s about control of funding, economics, and product design — the same motivation driving other fintech-to-bank moves we’ve discussed recently.
The Question SMB Owners Should Actually Ask
The Forbes article frames the most important borrower-side question directly:
Will my cost of capital go down — or just PayPal’s?
That distinction matters.
A bank charter gives PayPal access to cheaper, more stable funding. But lower cost of funds does not automatically translate into lower APRs, longer terms, or more borrower-friendly structures.
It creates optionality, not obligation.
Savings only reach borrowers when competition forces lenders to sharpen pricing.
Where PayPal Historically Competed — and Why That Matters
Here’s some important context that doesn’t always show up in coverage, but matters for understanding PayPal’s incentives.
Historically, PayPal has competed most directly with short-duration, first-position fintech lenders — the same category that includes firms like OnDeck, Kapitus, Rapid Finance, Credibly, and Mulligan Funding.
These lenders tend to share a few characteristics:
- Smaller deal sizes
- Short durations (often ~12–18 months)
- First-position repayment
- Pricing structured as fixed fees or rate/factor equivalents
In my experience competing against PayPal and LoanBuilder specifically, PayPal’s offerings were often meaningfully cheaper than broker-dependent competitors with similar duration — not because PayPal was taking dramatically more risk, but because the economics were cleaner.
Why LoanBuilder Was Often Competitive on Price
LoanBuilder is a useful example.
LoanBuilder offered:
- Fixed-term loans
- Weekly payments
- One fixed fee disclosed upfront
- No broker involvement
- No prepayment penalties
While PayPal never marketed pricing using factor-rate language, the effective economics for well-qualified borrowers over roughly 12 months often resembled low-teens fixed fees, especially when compared to broker-driven 1st-position alternatives with similar duration.
That relative affordability wasn’t accidental.
It flowed from three structural advantages:
- No broker commissions embedded in pricing
- Extremely low customer acquisition costs, marketing directly to existing PayPal merchants
- Tighter risk selection, based on proprietary transaction data
Open those products up to traditional ISO distribution, and those economics break immediately. That’s why PayPal never meaningfully did.
This Is Also Why PayPal Avoided Traditional Brokers
Despite being a large, active SMB lender for more than a decade, PayPal has never been meaningfully open to traditional loan brokers or ISOs.
Instead, PayPal has consistently favored:
- Direct merchant distribution
- Large platforms and marketplaces
- Highly controlled acquisition channels
And avoided broker channels due to:
- Cost inflation
- Incentive misalignment
- Reputational and compliance risk
PayPal Bank is not a pivot toward intermediaries. It’s a continuation of the same strategy: consolidate distribution, underwriting, and funding under one roof.
What Likely Changes — and What Probably Doesn’t
What could improve:
- More consistent nationwide availability
- Clearer regulatory oversight
- Greater flexibility in product structure
- More stable access to capital for PayPal-centric SMBs
What won’t automatically change:
- Short loan tenors
- Fixed-fee / factor-style pricing
- Platform-centric underwriting
- The need for borrowers to actively compare options
A bank charter doesn’t change PayPal’s underwriting DNA. It reinforces it.
That model works very well for some businesses — particularly those already running meaningful volume through PayPal. It’s less helpful for others.
Convenience Comes With Concentration Risk
One tradeoff worth highlighting is tighter coupling.
When payments, deposits, and credit live under one platform:
- Speed improves
- Friction drops
- Access feels easier
But concentration risk increases.
SMB owners should understand:
- Cross-default exposure across PayPal products
- How disputes or freezes propagate
- What happens when one platform controls both cash flow and credit
Embedded finance is powerful — but it concentrates leverage in ways borrowers should opt into consciously.
The Bigger Theme: Fintech Is Becoming Banking
PayPal’s move isn’t isolated.
- Square already operates a bank
- Enova is acquiring Grasshopper Bank
- Other fintech lenders are exploring similar paths
The pattern is clear: embedded, bank-funded SMB lending is replacing broker-centric distribution models.
That doesn’t eliminate banks. It changes what “bank” means.
What SMB Owners Should Take Away
Three practical lessons matter more than charter mechanics:
- Lower funding costs don’t guarantee lower rates.
Savings only reach borrowers when lenders are forced to compete. - Platforms optimize for themselves first.
That’s not a criticism — it’s reality. Borrowers need to understand incentives. - Middlemen aren’t where pricing power lives anymore.
In a world of embedded finance, transparency and direct comparison matter more than “access.”
Final Thought
If approved, PayPal Bank will almost certainly make PayPal a more efficient and more powerful SMB lender.
Whether it makes borrowing meaningfully cheaper for small businesses depends far less on the charter — and far more on how informed borrowers are when they shop for capital.
That distinction is the common thread tying PayPal’s move to the broader shift we’re seeing across the industry.