PayPal competes with bank loans – and with supply chain finance options?

I wonder whether a significant business announcement might have just slipped out over the summer without too much comment. PayPal, the online payment service owned by eBay, is to enter the online loans market in the UK for the first time. It will offer working capital to existing UK business customers, targeting small firms from the autumn.

The payments giant said users, including eBay sellers, will have access to an interest-free merchant cash advanced against their future sales. The move is initially just available to selected merchants but is expected to be rolled out more widely in 2015, and it comes just as reports suggest the UK Government’s bank lending scheme for small business is not delivering as was hoped. As the BBC reported; “Lending to small and medium-sized firms (SMEs) via the government's Funding for Lending Scheme (FLS) fell again in the second quarter of the year”.

PayPal says that access to the money will be extremely rapid – they will consider the customer’s previous sales profile (showing the power of ‘big data’ again), then can offer funds just five minutes after application. Consider how that compares with the process and timescale if you try to borrow a few hundred quid from a high street bank!

What is interesting and different from most supply chain finance type mechanisms is that repayments will be taken as a percentage of the new sales made by the merchants, so they will not have to dig into their reserves, or borrow at higher rates, if they aren’t doing well. Apparently, PayPal will not charge interest or late fees, and will make no external credit checks – so I assume they are taking the risk if the customer’s sales collapse? PayPal will however charge a fixed fee when the customer signs up to the working capital programme.

As well as being innovative in its own right, this is also in effect a competitor to the whole range of traditional and emerging supply chain finance options. Many of these eBay sellers will be in effect retailers, so may not also have large corporates as customers. But some will – so they may have the option of a Tungsten-type supply chain finance on offer on the one hand, via a large customer, and a PayPal advance on the other.

We’re far from being the supply chain finance experts that some of our colleagues are (read David Gustin here if you really want to get into this world), but it does strike us that firms offering supply chain finance will have to pitch their rates carefully. This is going to be a competitive market – in a few years time, smaller suppliers might find they have a number of interesting options to raise cash from their supply chain. Some of the expected margins from SCF offerings may prove to be overly ambitious, we suspect.

Discuss this:

Your email address will not be published. Required fields are marked *