PayPal Expands Lending with Swift Financial

by Raymond Pucci 0

This has been the year of the deal for PayPal. While inking many partnerships with other credit providers, it seeks to expand further into the alternative lending arena via its announced acquisition of Swift Financial as the following article reports.

Reuters reported that PayPal (PYPL) is acquiring Delaware-based Swift Financial for an undisclosed amount. Founded in 2006, Swift Financial writes loans for business borrowers.

PayPal is working to expand its credit business by acquiring Swift Financial. Through PayPal Credit, PayPal provides small loans to its merchant customers that are intended to be used for working capital. Since 2013, PayPal has supplied more than $3.0 billion in small business loans to ~115,000 small businesses.

Swift Financial counts Sutter Hill Ventures and First Round Capital among its backers. Swift Financial had raised more than $56 million when it agreed to sell itself to PayPal.

For the transaction to close, regulators must approve PayPal’s proposal to acquire Swift Financial. Once the deal closes, PayPal would add Swift Financial employees to its Business Financial Solutions team, retain the majority of Swift’s leadership, and continue to run the firm’s area offices.

PayPal’s acquisition of Swift Financial marks an escalation of competition with Square (SQ) and Amazon (AMZN) for control of the alternative lending market. Since the 2007 financial crisis caused large banks like Bank of America (BAC) and JPMorgan Chase (JPM) to reduce their exposure to risky lending, there has been an unmet credit need in the small business and consumer lending markets.

As such, online payment processors like PayPal and Square are moving to fill the gap and in the process, generate additional revenues.

Strategically, this move is both an offensive and defensive one for PayPal. The company already operates PayPal Working Capital which provide alternative lending to small businesses. But other payments competitors such as Square and Amazon are actively courting their business clients looking for funding sources, making this a market that PayPal cannot afford to concede. The deal for Swift Capital brings additional market share to PayPal and helps to prevent small business clients looking elsewhere. Big winners will be business owners who now have a variety of lenders providing competitive rates and terms.

Overview by Raymond Pucci, Associate Director, Research Services at Mercator Advisory Group

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