For more than a decade, PayPal has acted like a bank for small businesses without actually being one.

Since launching its lending programs, the payments company says it has provided more than $30 billion in financing to hundreds of thousands of small businesses worldwide. But until now, every one of those loans had to be routed through sponsor banks that officially held the charter, collected deposits, and took a share of the economics.

That arrangement may soon end.

In December, PayPal confirmed it had filed applications with state and federal regulators to establish PayPal Bank, a Utah-chartered industrial loan company, according to Reuters.

If approved, PayPal would be able to make loans and accept deposits directly, without relying on third-party banks as intermediaries.

Why PayPal Wants Its Own Bank

The motivation is straightforward.

Under the sponsor-bank model, PayPal handles underwriting, customer relationships, and risk assessment, while partner banks legally issue the loans. Those banks collect fees for their role, which eats into PayPal’s margins and slows product expansion.

By operating under its own charter, PayPal could fund loans directly, keep the full spread, and move faster.

The company said in a PayPal newsroom announcement that the goal is to “expand access to capital for U.S. small businesses” while improving efficiency across lending and savings products.

What An Industrial Loan Company Allows

An industrial loan company is a specialized type of bank that can accept FDIC-insured deposits and make loans, while avoiding oversight under the Bank Holding Company Act.

That structure has long attracted fintech firms because it allows commercial companies to own a bank without being regulated like traditional bank holding companies.

If PayPal’s application is approved, the company would be able to:

• Offer FDIC-insured savings accounts
• Fund small-business loans directly
• Reduce reliance on sponsor banks
• Potentially offer cheaper and faster credit

According to Euronews, PayPal also plans to seek deeper integration into payment networks as part of the expansion.

Leadership Signals This Is Not Cosmetic

PayPal has appointed Mara McNeill, former CEO of Toyota Financial Savings Bank, to lead the proposed bank.

Her background running an FDIC-insured industrial bank signals that PayPal intends to operate a fully compliant financial institution, not simply acquire a charter for regulatory arbitrage.

That choice matters. Regulators have historically been skeptical of fintech firms that appear to want banking privileges without banking discipline.

What This Means For Small Businesses

For small business owners, the impact could be tangible.

PayPal already uses transaction data rather than traditional credit scores to underwrite loans, which allows it to lend to businesses that banks often reject outright.

With its own charter, PayPal could approve smaller loans more efficiently, reduce costs, and expand credit access during periods when banks pull back.

As Yahoo Finance noted, direct funding could also allow PayPal to offer more competitive rates by cutting out middlemen.

Regulatory Risk Still Looms

Approval is not guaranteed.

Industrial loan companies remain controversial in Washington, with critics arguing they weaken financial oversight by letting commercial firms own banks.

Banking Dive reports that previous ILC applications have faced political resistance, particularly when applicants are large technology firms.

If PayPal is approved, it could open the door for other fintechs to follow. If rejected, it would signal clear limits on how far regulators are willing to let the fintech-bank convergence go.

The Bigger Shift Underway

PayPal’s move is part of a broader trend.

Fintech companies are no longer content to sit on the edges of the banking system. Payments firms want deposits. Lending platforms want charters. Technology companies want direct access to capital markets.

For consumers and small businesses, that means more options, faster credit decisions, and potentially lower costs.

It also means the traditional line between “bank” and “fintech” is disappearing.

Article Sources

1. PayPal Newsroom. “PayPal Submits Applications to Establish an Industrial Bank” 
2. Reuters. “Payments firm PayPal files for bank charter in lending push”
3. Euronews. “PayPal moves to establish US bank, expanding deposits and loans”
4. Banking Dive. “PayPal seeks bank charter” 
5. Wikipedia. “Industrial loan company” 
6. Yahoo Finance. “PayPal seeks bank charter”