PayPal Holdings just submitted applications to become a full-fledged financial institution in the United States.
The San Jose-based payments giant filed paperwork with both the Federal Deposit Insurance Corporation and the Utah Department of Financial Institutions to establish a Utah-chartered industrial loan company that would operate as PayPal Bank.
We’ve seen other companies do this before (looking at you, Stripe). So, what does this actually mean for merchants? Or does it simply give PayPal more control?
What PayPal as a Bank Actually Means
PayPal wants to establish an industrial bank, a specific type of financial institution that differs from traditional banks. Unlike conventional financial institutions such as commercial banks, credit unions, and investment bank operations, industrial loan companies don’t require registration as bank holding companies under the Bank Holding Company Act.
This clever maneuver allows PayPal to avoid Federal Reserve supervision while still accessing the benefits that traditional financial institutions enjoy.
The application promises several new capabilities for PayPal. The company plans to offer savings accounts with interest to customers, expand small business lending capacity, and establish direct connections to card networks in the United States.
Most importantly, PayPal would gain access to FDIC insurance for customer deposits, the same federal deposit insurance that protects deposits at traditional banks, insurance companies, and credit unions overseen by the National Credit Union Administration.
PayPal CEO Alex Chriss claims this move will “strengthen our business and improve our efficiency, enabling us to better support small business growth”.
The Merchant Account Question Nobody’s Answering
Here’s where things get interesting for business owners. Currently, PayPal operates fundamentally differently from traditional merchant account providers. The company doesn’t require merchants to complete rigorous underwriting before they start processing payments, which is how conventional banks and payment processors handle risk management.
PayPal’s approach has always been to let merchants start processing first and ask questions later, typically triggering their underwriting process only when transaction volumes exceed certain thresholds, often around $20,000 per month.
Will becoming a financial institution change this practice? PayPal remains conspicuously silent on this question. Traditional banks that issue credit card processing capabilities and maintain merchant accounts conduct thorough underwriting from the start because they’re subject to strict federal financial regulations and oversight.
They examine business information, assess transaction history, and evaluate financial stability before approving merchant accounts. This protects the financial institution from risk, but it also protects merchants from unexpected account freezes and fund holds.
PayPal’s current model creates significant problems for growing businesses. Merchants build their entire payment infrastructure on PayPal, scale up their operations, and then suddenly face account reviews, reserves, or even freezes when they cross invisible thresholds.
This reactive approach to risk management has frustrated countless business owners who thought they were operating within acceptable parameters.
Will This Make Life Easier for Merchants?
The uncomfortable truth? Probably not. Becoming a regulated bank account provider with federal deposit insurance responsibilities means PayPal will face increased scrutiny from regulators. The company will need to demonstrate sound risk management practices, maintain capital requirements, and prove it can protect depositors whether those deposits sit in savings accounts or in money market instruments.
These obligations typically push financial institutions toward more conservative, not less conservative, underwriting practices.
PayPal already extended $30 billion in loans and working capital to small businesses without a bank charter. The company’s motivation for seeking bank status centers on reducing dependence on third-party banking partners and funding loans more directly.
This plan only benefits PayPal’s bottom line, not yours. The company wants to offer interest on deposits to attract capital, bypass intermediary banks, and keep more revenue in-house.
Don’t expect this new status to solve PayPal’s fundamental merchant service problems. The company still won’t be the cheapest option available. PayPal’s fee structure has always priced higher than many traditional merchant account providers, and becoming a regulated financial institution adds compliance costs that typically get passed to customers, not absorbed by shareholders.
The Real Cost-Benefit Analysis
You should ask yourself: “Does PayPal’s convenience justify its costs and risks?”
If you run a small operation processing under $20,000 monthly, PayPal’s easy setup and delayed underwriting might still make sense (at least until you trigger their review process). But businesses with serious growth ambitions should question whether building on PayPal’s foundation serves their long-term interests.
Traditional merchant accounts require upfront work. Banks and payment processors ask for business documentation, financial statements, and transaction projections from day one. This process can feel burdensome compared to PayPal’s instant approval, but it establishes clear expectations and stable processing terms.
You know your rates, understand your limits, and avoid nasty surprises when your business succeeds.
PayPal as a bank won’t eliminate these fundamental tradeoffs. The company joining the types of financial institution like broker dealers, commercial banks, and credit unions means it faces the same regulatory pressures that drive conservative lending and processing policies across the financial services industry. PayPal might offer slightly better rates on business loans or marginally improved terms for high-volume merchants, but expecting revolutionary change misses how banking regulation actually works.