PayPal Files for Utah ILC Charter to Originate SMB Loans Directly

PayPal submitted applications on December 15, 2025 to the Utah Department of Financial Institutions and the FDIC to establish PayPal Bank as an Industrial Loan Corporation. If approved, PayPal will originate small business loans directly rather than purchasing receivables from WebBank—eliminating the sponsor bank relationship that has intermediated its lending operations since 2013.

• Cumulative lending: $30 billion in loans and working capital to 420,000+ business accounts globally since 2013—roughly $2.5 billion annually, with $1.5 billion net portfolio value at end of 2024¹⁴

• Credit performance: Net chargeoff rate spiked to 18.8% in 2023 due to loosened underwriting; corrective measures brought it down to 5.3% in 2024⁴

• Leadership: Mara McNeill, former CEO of Toyota Financial Savings Bank (an existing Utah ILC), will serve as PayPal Bank President²

• Regulatory climate: FDIC Acting Chair Travis Hill has signaled openness to ILC applications, withdrawing a proposed rule that would have required ILCs to operate independently from parent companies¹⁰

• Competitive context: Square's ILC (approved 2020) originated $5.7 billion in 2024 alone—more than double PayPal's annual average—while Shopify Capital originated ~$3 billion⁵⁶

• Timeline: Approval could take 12-24 months given typical FDIC review cycles; GM Financial's application languished for 3.5 years before conditional Utah approval¹⁶

The immediate implication: PayPal is positioning to compete on cost structure rather than just distribution advantage. Access to FDIC-insured deposits and direct card network membership would reduce their funding costs significantly, while eliminating WebBank's origination fees. For alternative lenders, this signals another platform player moving from partner to direct competitor.

What Alternative Business Lenders Need to Know

Why is PayPal doing this now?

The timing isn't accidental. FDIC Acting Chair Travis Hill has made clear his support for ILC applications—he voted against a 2024 proposal that would have required industrial banks to operate independently of their parent companies and demonstrate they could meet community lending needs.¹⁰ That proposal is now dead. Hill has explicitly called the ILC charter "one of a handful of ways to boost the establishment of new banks," and his FDIC is actively soliciting comments on the ILC framework through a formal Request for Information.⁹

PayPal has been watching Square closely. Block received its ILC approval in March 2020 and launched Square Financial Services in 2021. The results speak for themselves: Square originated $5.7 billion in business loans in 2024 alone, with a single quarter (Q4 2024) producing $1.54 billion.⁵ Compare that to PayPal's cumulative $30 billion over 12 years—roughly $2.5 billion annually. Square is now running circles around PayPal in SMB lending despite having a smaller merchant base.

The difference? Square controls the full stack. They originate through Square Financial Services, hold loans on their $430 million balance sheet (as of their latest call report), and sell the majority to institutional investors.¹¹ PayPal, by contrast, has been purchasing receivables from WebBank—paying origination fees, losing some pricing flexibility, and depending on a bank partner whose "business changes could disrupt services," as their own press release acknowledged.¹⁵

What are the actual cost structure benefits?

The economics of an ILC charter are compelling. PayPal would gain access to FDIC-insured deposits—currently, Square Financial Services has over $300 million in business savings accounts paying 1.00% APY.¹² That's dramatically cheaper funding than warehouse lines or purchasing receivables. The average alternative lender is paying somewhere between 200-400 basis points more for capital.

Direct access to card network membership is another play. PayPal currently relies on banking partners for processing and settlement. Direct Visa/Mastercard membership would eliminate those fees and give PayPal more control over authorization and settlement timing—critical for their MCA-style products where repayment is tied to daily sales percentages.³

Perhaps most importantly, PayPal would gain interest rate exportation—the ability to export Utah's interest rate and fee caps across state lines.⁸ This is the same regulatory arbitrage that made WebBank such an attractive partner for fintech lenders in the first place. Now PayPal wants that capability in-house.

What does PayPal's lending performance actually look like?

Here's where it gets interesting. PayPal's 2024 annual report reveals they had a rough 2023. The net chargeoff rate on their PayPal Business Loan portfolio spiked to 18.8%—up from just 4.5% in 2022. The culprit? They expanded acceptable risk parameters in 2022, which (to quote their own filing) "resulted in a decline in the overall credit quality of loans outstanding."⁴

They've since course-corrected. The 2024 chargeoff rate dropped to 5.3%, and their net merchant loan portfolio grew to $1.5 billion from $1.2 billion—though still well off the $2.1 billion peak in 2022. The tighter underwriting constrained origination volumes in 2023, but they're ramping back up. First-half 2025 saw approximately $1 billion in merchant receivable purchases, compared to $774 million in the same period of 2024.²¹

For comparison, Shopify Capital—which also uses a bank partner model (they purchase loans from their banking partner)—reports 91.9% current rates as of Q3 2025, down from 93.7% at year-end 2024.⁷ PayPal's most recent filing shows 89.9% current rates as of June 2025. Both are seeing slight deterioration, but nothing alarming by alternative lending standards.

How does this change the competitive landscape?

The platform lending market is consolidating around companies that own the customer relationship, the payments data, and now the lending infrastructure. Square already has it. Shopify is expanding (they originated $1 billion in Q2 2025 and are on pace to exceed their $3 billion 2024 total).²² PayPal is making its move.

For traditional alternative lenders, this creates a bifurcated market. On one side, you have platform players with embedded distribution, real-time transaction data, and increasingly, bank-level cost structures. On the other, independent lenders competing on sales expertise, speed, and flexibility but paying more for capital and acquiring customers through brokers and ISOs.

The numbers tell the story. The embedded lending market reached $10.4 billion in 2024 and is projected to grow at 20.5% CAGR through 2034.²⁰ The broader embedded finance market hit $104.8 billion in 2024, growing at 23.3% annually.¹⁹ Only 44% of SMBs currently have access to external financing, and 37% of those who do say they're interested in switching to platforms offering embedded lending.¹⁸ The addressable market is massive—and the platforms are coming for it.

What should alternative lenders watch for?

First, watch PayPal's underwriting approach post-charter. Their 2023 chargeoff spike happened when they loosened standards to grow volume. If the ILC approval leads to aggressive expansion, watch for credit quality signals—their portfolio concentration in e-commerce merchants, geographic distribution, and how they handle the merchants already on their platform who've been declined under current criteria.

Second, track their product expansion. PayPal mentioned interest-bearing savings accounts in their announcement.¹ Square already offers Square Savings and recently got FDIC approval to offer Cash App Borrow—a consumer micro-lending product that did $9 billion in originations in 2024 through an external bank partner.¹³ PayPal will likely follow a similar playbook: business lending first, then consumer products, then broader banking services.

Third, monitor the regulatory domino effect. GM Financial resubmitted its ILC application in January 2025 after pulling it in June 2024.¹⁶ Nissan applied in June 2025.¹¹ Sezzle's CEO has said publicly they're considering a Utah ILC.² If PayPal gets approved efficiently, expect a wave of fintech and embedded finance companies to follow. The FDIC noted in its recent RFI that it "anticipates potential continued interest in the establishment of industrial banks."⁹

What's the realistic timeline?

Don't expect this to happen quickly. GM Financial applied in December 2020 and only received conditional Utah approval in June 2024—three and a half years later—before pulling their FDIC application to "address feedback."¹⁶ Even in a more favorable regulatory environment, ILC approvals typically require 12-18 months minimum. PayPal will need to demonstrate adequate capitalization, operational separation from the parent company, management expertise (McNeill's Toyota Financial Savings Bank background helps here), and a viable business plan. The earliest realistic launch would be late 2026 or early 2027.

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