In a landmark move poised to reshape the digital banking and small-business lending sectors, PayPal Holdings, Inc. has formally applied to U.S. regulators to establish its own industrial bank. If approved, this would mark the first time a major fintech company transitions into a fully chartered financial institution, with the specific aim of expanding access to credit for millions of undeserved small businesses across the United States.
The application, submitted to the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Utah Department of Financial Institutions, seeks to form “PayPal Bank,” an industrial loan company (ILC) headquartered in Salt Lake City, Utah. Unlike traditional banks, industrial banks are permitted to accept deposits and offer loans while being owned by non-financial corporations a model that has attracted tech giants like Google and Amazon in recent years, though none have yet succeeded in gaining full approval.
For PayPal, the strategic pivot represents a culmination of a decade-long evolution from digital wallet provider to comprehensive financial services platform. The company, which processed over $1.3 trillion in payment volume last year, now aims to leverage its vast trove of transaction data and customer relationships to address one of small businesses‘ most persistent challenges: access to affordable capital.
A Growing Need for Small-Business Credit
Small enterprises form the backbone of the U.S. economy, contributing to nearly 44% of economic activity and employing nearly half of the nation’s workforce, according to the U.S. Small Business Administration. Yet for many entrepreneurs, especially those from historically marginalized communities or early-stage founders, securing traditional bank financing remains a formidable hurdle.
“Commercial banks often rely on rigid underwriting criteria that prioritize long credit histories and hard collateral,” said Dr. Linda Chen, a senior economist at the Brooking Institution. “This creates a lending gap for small businesses with inconsistent cash flow or limited assets precisely the types of companies that now dominate the digital economy, like independent creators, e-commerce sellers, and gig workers.”
PayPal’s application directly targets this gap. The company’s leaders argue that its real-time transactional data detailing sales trends, customer activity, and seasonal fluctuations offers a more accurate and dynamic picture of a business’s financial health than conventional credit scores.
“Traditional lending models were built for a different era,” said Dan Schulman, President and CEO of PayPal, in a statement. “We see an opportunity to transform small-business lending by using data more responsibly and responsibly expanding access to capital. This is about helping entrepreneurs grow not just processing their payments.”
How PayPal Bank Could Work
Under the proposed model, PayPal Bank would offer FDIC-insured deposit accounts, allowing customers to store funds securely within the PayPal ecosystem. More critically, the bank would originate small-business loans directly, using proprietary algorithms trained on anonymized transaction patterns to assess creditworthiness.
PayPal emphasizes that its lending platform would not rely on interest-heavy loan structures. Instead, the company is exploring revenue-sharing agreements, hybrid loan-equity models, and dynamic repayment terms tied to real-time sales innovations designed to reduce borrower risk and improve cash flow management.
Pilots launched in 2022, under PayPal’s existing Working Capital and Business Loan programs, have already extended over $2.6 billion in funding to more than 150,000 businesses, with default rates reportedly 30% lower than industry averages. Experts note that this success stems from PayPal’s ability to identify repayment capacity through cash flow analysis rather than static credit scores.
“PayPal has a unique data advantage,” said Marcus Reed, a fintech analyst at Bernstein Research. “It sees the daily heartbeat of millions of small businesses. That allows for more nuanced risk assessment something legacy banks simply don’t have.”
Regulatory Hurdles and Competitive Backlash
Despite the promise, the path to approval is far from certain. Industrial bank charters are subject to intense regulatory scrutiny, particularly when sought by technology firms that already wield significant market power. Consumer advocates and banking lobbyists have raised concerns about potential conflicts of interest, data privacy, and the concentration of financial services in the hands of a few dominant tech companies.
The American Bankers Association (ABA) issued a statement expressing caution: “While innovation in lending is welcome, we urge regulators to ensure a level playing field. Companies like PayPal should not be allowed to bypass traditional oversight simply because they reside in a tech wrapper.”
Senator Elizabeth Warren (D-MA), a longtime critic of big tech’s financial ambitions, echoed these sentiments: “We’ve seen what happens when Silicon Valley enters finance without proper guardrails the 2008 crisis taught us that. We must ensure PayPal doesn’t become too big to fail, or too opaque to regulate.”
PayPal has responded by emphasizing its commitment to compliance and transparency. The company plans to operate the bank as a wholly separate subsidiary, with its own board, risk management protocols, and capital reserves. It has also pledged to submit to all prudential regulations, including capital adequacy requirements and stress testing.
Moreover, PayPal is not seeking to compete with large commercial banks on consumer deposits. Instead, the focus will remain narrowly targeted on small-business financial products a niche area where demand greatly outpaces supply.
Strategic Implications for the Fintech Industry
If approved, PayPal Bank would join a select group of fintech firms that have successfully transitioned to banking charters, including Square (now Block, Inc.) and Green Dot Corporation. However, PayPal’s scale and user base over 430 million active accounts give it the potential to influence industry standards.
“We could be witnessing the start of a new era,” said Priya Shah, a financial technology strategist at Deloitte. “When a company with PayPal’s reach becomes a bank, it forces traditional players to rethink data-driven underwriting, customer experience, and digital-first service delivery.”
The move could also accelerate partnerships between fintechs and community banks, many of which lack the technological infrastructure to compete in digital lending. PayPal has already initiated exploratory talks with regional institutions to co-lend or provide back-end processing support.
What’s Next?
Regulatory review of the application is expected to take between 12 and 18 months. During this period, PayPal will undergo extensive examination of its business model, governance structure, anti-money laundering protocols, and consumer protection safeguards.
In the meantime, the company continues to enhance its existing small-business offerings. Last month, it rolled out “PayPal Merchant Lending Insights,” a free dashboard that helps business owners understand their loan eligibility and financial health. It also expanded its cash flow forecasting tools and integrated them with popular accounting platforms like Quick Books and Xero.
Regardless of the charter’s outcome, the application signals a broader shift in the financial services landscape. As digital commerce grows and consumer expectations evolve, fintech platforms are no longer content to be mere “channels” for banking they want to become banks themselves.
For millions of small-business owners, PayPal’s ambitions may represent not just a new source of capital, but a fundamental re-imagining of who gets funded and how.
