PayPal quietly makes bigger moves into business banking

Small businesses have always faced the same brutal truth: banks don't want to lend to them. They're too risky, the loan amounts are too small, and the paperwork is too expensive relative to the potential interest earned. So for the past dozen years, PayPal has quietly stepped into that gap, becoming an unofficial lending machine for companies that couldn't get a nickel from their neighborhood bank branch.PayPal has lent more than $30 billion to 420,000 small business accounts globally, according to the PayPal Newsroom. That's a staggering amount of capital flowing to the exact businesses that the traditional banking system has abandoned. I am running a few minutes late; my previous meeting is running over.But here's the problem PayPal has been wrestling with: it hasn't been able to do it alone. Every single loan PayPal arranged had to go through a third-party bank—first WebBank, later Wells Fargo, JPMorgan Chase, and Goldman Sachs. Those sponsor banks took their cut. PayPal made the sale, did the underwriting, managed the relationship, and then handed the actual lending to someone else and split the profits.On Monday, CNBC and WSJ reported that PayPal decided it was done sharing. The company announced it had applied to establish PayPal Bank, a Utah-chartered industrial loan company, with applications filed to both the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation. If approved, PayPal would no longer need sponsor banks. It would make its own loans, accept its own deposits, and keep all the money that used to go to middlemen.This is a turning point—both for PayPal and for how small business owners or savers, might access capital and savings products in the next decade. PayPal is blurring lines between fintech and bank.

Shutterstock Why PayPal wants out of the sponsor bank gameThe math is simple and brutal. Every time PayPal arranges a loan through Wells Fargo or Goldman Sachs, those banks take a cut. The sponsor bank gets paid for the privilege of being the "bank of record."PayPal has been in talks about getting its own banking license before. A 2019 article by the American Banker shows how PayPal, Google, and dozens of other fintechs approached the Office of the Comptroller of the Currency about getting a national banking charter. That effort fizzled. Political pressure mounted. Regulators got cold feet. Everyone walked away.This time feels different.Alex Chriss, PayPal's president and CEO, framed the move as a practical solution to a customer problem. His words were: "Securing capital remains a significant hurdle for small businesses striving to grow and scale," according to Reuters. That's true. But the real reason PayPal is doing this is simpler: it wants to eliminate the middleman and pocket the profits that used to flow to sponsor banks.More Personal Finance:Estate planning tips every blended family needs to knowDave Ramsey sounds nationwide Medicare alarmAfter Your Death, Who Takes Care of Your Dog?What Medicare Part B price hike means for your 2026 Social SecurityStudent loan forgiveness at risk for manyHere's what an industrial loan charter actually gives PayPal—and why it's so valuable:Direct access to cheap capital. An ILC charter means PayPal can go straight to the Fed. The savings add up fast when you're lending billions of dollars.FDIC insurance for deposits. That's a new revenue stream: the interest rate spread on savings accounts. A small business keeping $50,000 in a PayPal savings account at 4% means PayPal can invest that money at 5% or 6% and pocket the difference.Direct payment network membership. PayPal will seek direct membership with Visa, Mastercard, and American Express. Freedom from state usury laws. This opens up lending opportunities that wouldn't be profitable under state regulations.Who's running this Thing, and why it mattersPayPal has appointed Mara McNeill as president of PayPal Bank, per a Seeking Alpha report. McNeill spent 25 years in financial services and most recently ran Toyota Financial Savings Bank, an FDIC industrial loan company that provides banking services to Toyota and Lexus dealerships. Translation: she's not a startup founder or a payments veteran. She's a serious banking executive who understands how to actually operate a bank.McNeill's hiring signals that PayPal is serious about becoming a real bank—not just using a banking license as a tax dodge or regulatory workaround.How this changes things for businessesAnyone who has ever tried get a business loan, knows the traditional process: call the bank, sit down with a loan officer, wait six weeks for underwriting, get rejected, and start over. It's slow. It's personal. It's brutal.PayPal's lending process works differently. It's automated. It uses transaction history, not personal credit scores. It approves loans in days, not weeks. And importantly, it lends to businesses that traditional banks would reject outright—businesses with uneven revenue, businesses in high-risk industries, and businesses without enough assets to collateralize a loan.With an industrial loan charter, PayPal could make that process even faster and cheaper. Without sponsor bank approval hanging over every loan decision, PayPal could approve smaller loans (where sponsor bank costs made them unprofitable). It could iterate faster. It could test new products without needing a sponsor bank's blessing.For businesses, that means: cheaper loans, faster approvals, and fewer gatekeepers. If a business has been turned down by a traditional bank, PayPal's lending becomes more accessible.What industrial loan companies actually are An industrial loan company is a clever regulatory loophole that became standard practice. ILCs can accept deposits and make loans without being subject to the Bank Holding Company Act—the federal law that gives the Federal Reserve supervision over traditional banks. Instead, they're regulated by state banking authorities and the FDIC.PayPal's application matters because PayPal is a $57 billion company, per Forbes, with a clean track record of lending $30 billion responsibly. That's not a startup asking for a favor. That's a proven operator with demonstrated competence. The bigger Story: fintech banks are herePayPal's move isn't unique. Other buy-now-pay-later companies are exploring ILC charters. Other payments companies are watching carefully. If PayPal gets approved, it becomes a roadmap for competitors. If PayPal gets rejected, it signals that regulators are drawing a line somewhere.But here's what's really happening: the boundary between "fintech company" and "bank" is erasing. Companies that started as payment processors are becoming financial services platforms. Companies that started as lending marketplaces are becoming banks. This blurs the old categories.For small business owners, the saver, the retail investor—it means there are about to be more options for borrowing and saving money. Those options will likely be cheaper and faster than the traditional banking system. They'll also come with some regulatory risk: if something goes wrong with a fintech bank, deposits are FDIC-insured up to $250,000, but the bank itself could fail.What happens nextThe regulatory approval process is unpredictable. PayPal says it will "work closely" with regulators. That's corporate speak for "we have no timeline and anything could happen." The application could be approved in months or rejected after years of back-and-forth. Regulators could impose conditions PayPal didn't anticipate.But the fundamentals are strong. PayPal has proved it can lend responsibly at a massive scale. The political environment is more favorable to fintech banking than it's been in years. And the economics are compelling: PayPal saves money, small businesses get cheaper capital, and the entire financial system becomes more competitive.Related: What a BofA analyst just said about PayPal put investors on alert