On more than one occasion since late-2012, yours truly has pointed out that the nation’s banks have been errantly chasing away small customers. While the focal point of that trend has thus far been individual consumers and their personal accounts, it should come as no surprise that big banks have also been quietly, gradually shunning small business borrowers, too.
Fortunately, eBay (EBAY) division PayPal is coming to the rescue, by extending credit to small enterprises needing loans of less than $60,000. It’s not like the program is going to make an immediate beneficial impact on the company’s financials. Ergo, the news is no reason a newcomer wound want to run out and open a position in EBAY stock. Still, the idea does pose some interesting possibilities.
Potential Impacts on EBAY Stock
The official name of the service is PayPal Working Capital. The program was piloted late last year, but is now openly available to all small businesses looking for a way to stabilize their financials with a quick cash infusion.
The loans aren’t collateralized, but rather, are granted largely based on the strength of future sales … particularly those booked through PayPal. While no interest is charged, the loans cost between 7% and 15% of the loan’s size — upfront — depending on the borrower and the size of the loan in question.
Yes, this is an exciting prospect for anyone who owns EBAY stock. The company reports that it has already loaned more than $150 million to small business, and with an average upfront fee of 11%, that’s roughly $16.5 million in revenue before any major effort was made to promote the service. Now that it’s publicly available (and rumored to be expanding to the United Kingdom and Australia), that figure could be ratcheted up rather quickly.
For perspective, the Small Business Association reported that in fiscal 2013, SBA lending in the United States hit a total of $29.6 billion. Even capturing a modest fraction of that total could be a windfall for eBay.
But the venture might also be a reason for concern to EBAY stock owners.
Although eBay and PayPal aren’t lumped in with other banking stocks like Bank of America (BAC) or Citigroup (C) and are therefore not subject to banking regulations, that’s not to say it could never happen. When the pilot program was first unveiled in late 2013, the Consumer Financial Protection Bureau did probe the program. Though little came of the probe, the CFPB could still largely determine how well PayPal Working Capital performs, if it decided eBay was crossing a regulatory line.
More Morphing of the Term “Financials”
While interesting, it’s not particularly surprising to see PayPal get into a business segment that traditional banking stocks have been working to shed. EBAY stock joins a large number of names that can be classified as financials, if not technically, than at least effectively.
Walmart (WMT) is most definitely on that list now that its in-store Money Centers can do everything a bank can do, and in some cases more. Amazon (AMZN) is also tip-toeing into the realm with its recent debut of Amazon Wallet. Although Amazon Wallet currently only stores loyalty card and gift card information, it’s not as if the company has veiled its goal of becoming a facilitator of monetary transactions. There are plenty of other less-potent players on the fringe of the industry, too.
Banks continue to fight their way to irrelevancy, allowing names like eBay, Walmart, and Amazon to become financials in small ways and positioning themselves to become financial powerhouses in large ways when the right time comes.
Specifically, the point in time when a mortgage loan is available at your local Walmart may not be too far down the road. It wouldn’t be a stretch to say that Amazon and eBay aren’t too far behind, even if all three companies are simply middlemen for “real” banks serving as the actual lender. The key is being accessible where consumers are, which is increasingly “online.”
Again, this probably isn’t going to be a game-changer for current or prospective owners of EBAY stock. The company generated a profit of $2.85 billion in 2013, and even a strong showing from its business lending efforts wouldn’t prove to be much of an immediate boost to the company’s bottom line. But, as time goes and PayPal Working Capital captures bigger and bigger pieces of the $29.6 billion small business lending pie, the venture could prove to be a decent moneymaker.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.