PayPal And Other Tech Firms Enter Traditional Banking

Using technology to provide a relatively inexpensive service to people who fear or do not have access to traditional banks. Who are exactly the sort traditional banks disdain because they are not profitable enough under most government finance regulations.

But the tech companies realize they can hoover up lots of cash from such customers - and that all those little deposits add up globally to 'real money.' JL


Peter Rudegair reports in the Wall Street Journal:

The company’s goal is to give those excluded from the banking system access to the digital economy. Consumers with smaller balances are largely ignored by banks and have to rely on check-cashing centers and other alternative providers of financial services. Other technology firms with large user bases are looking at providing banking functions. Square Inc. gives out bank cards, and Amazon. has been in discussions to build a checking-account product for its customers.
PayPal PYPL -0.38% Holdings Inc. is nudging its customers closer to mainstream banking services.
The San Jose, Calif.-based payments company has been reaching out to groups of customers in recent months with an offer to add basic banking features to their PayPal digital wallet. The features include Federal Deposit Insurance Corp. insurance for balances up to government-set limits, a debit card that can be used to withdraw cash at ATMs and the ability to add funds to accounts by taking a photo of a paper check or by having employers direct-deposit earnings there.

PayPal users already served by traditional banks may not be tempted to ditch their existing checking accounts. The company isn’t paying interest on balances and is charging a fee of 1% on any check a customer deposits via a photo, in addition to fees for taking money out from ATMs other than the 25,000 inside PayPal’s network, said Bill Ready, PayPal’s chief operating officer.
But it could be a better option for certain consumers with smaller balances who are largely ignored by banks and have to rely on check-cashing centers and other alternative providers of financial services. PayPal isn’t charging a monthly fee and isn’t requiring customers to keep a minimum balance.
In contrast, Bank of America Corp. earlier this year discontinued a free checking account popular with lower-income customers, switching them into one that charges a $12 monthly fee unless certain conditions are met.
Mr. Ready said the company’s goal was to give those excluded from the banking system access to the digital economy. “If you don’t have a bank account, you can’t take an Uber ride, can’t stay in a room on Airbnb,” Mr. Ready said.
PayPal has been adding other financial functions to its website and smartphone apps that go beyond its original business of offering a checkout button that enabled shoppers to buy goods and services online. Through a series of partnerships and acquisitions, PayPal now offers consumer loans, cross-border remittances and automated savings and investment services.
A number of other technology firms with large user bases are looking at providing banking functions. Square Inc. gives out bank cards to users of its Cash App who want one, and Amazon.com Inc. has been in discussions to build a checking-account-like product for its customers.
There is a catch, though: PayPal and other tech firms don’t have a U.S. banking license. The FDIC doesn’t backstop funds stored at nonbanks, and Visa Inc. and Mastercard Inc. only permit cards that run on their network to be issued by banks.
In PayPal’s case, the company turned to a hodgepodge of small banks that stay anonymous and behind the scenes. It cut deals with a Delaware bank to issue debit cards, a Georgia bank to deposit checks instantly after users take a photo of them and banks in Utah to make loans to consumers and small businesses.
“It’s mostly just a question of stringing together the supply chain,” said Thomas Brown, a partner in the global banking and payment systems group at law firm Paul Hastings LLP. “You can use technology to create the appearance of integration across accounts at different financial institutions.”
Mr. Ready said that working with several different banks allows PayPal to get products out to consumers faster and that the company has no intention of becoming a bank. He added that if its users already have bank accounts they are using within PayPal, “this isn’t an account for you.”
PayPal launched a prepaid card that offered some banking features in 2012 but charged users fees when they opened an account and when they loaded funds to it.