PayPal Expands Its Digital Reach with LendUp Investment

Why Is PayPal Interested in an Online Lender to Risky Debtors?

At the end of June the digital payment platform, Paypal confirmed an investment in the startup loan company LendUp. LendUp provides personal loans to risky debtors. These are the individuals that banks and traditional lenders vehemently turn away. However, by providing a new set of tools to this demographic, LendUp is actually giving them a leg up on financial stability.

Still, this doesn’t explain why a successful platform such as Paypal would give more than a passing glance to an online lender like LendUp.

A Look at LendUp Prior to PayPal

LendUp’s own path to financial health and investment from the likes of PayPal has not been without certain obstacles. The startup was founded in the San Francisco Bay Area back in 2012, when it began offering the digital equivalent of payday loans. LendUp Ladder, as the service was called, soon ran into regulatory issues. LendUp was forced to pay $3.6 million in fines and refunds through the U.S. Consumer Financial Bureau of Protection and another $2.7 million in settlement with California Department of Business Oversight.

These costs were imposed because of LendUp’s business practices between 2012 and 2014. Businesses practices that violated a slew of payday and installment lending laws on the state and federal levels. Since 2014, there haven’t been reports of further violations. With PayPal onboard, it is likely that LendUp is running with a more substantial team that is more prepared  to oversee lending and digital payments.

However, these past regulatory problems are hard to ignore, and LendUp is operating in an inherently risky space. It provides loans to individuals denied through traditional banks because there is fear of non-payment. While LendUp might do this smarter and with fewer costs, risk of non-payment cannot be entirely eliminated. Despite these risks, the company’s more recent success and digital presence has Paypal making a strategic investment.

A Digital Payment Partnership Built on Values

LendUp estimates that 56% of Americans are denied traditional sources of borrowing, and it wants to change that. The company takes note of credit score and income, but it doesn’t deny borrowers on those factors. Instead, it provides short-term, small-amount loans that give these risky borrowers a chance to do what other creditors deny, build credit. Repayment is then rewarded.

Behind the scenes, LendUp is passionate about assisting this “rising middle-class” of Americans. It wants to see customers establish good financial habits and build savings. Eventually, these individuals would become eligible for traditional lending. Although, LendUp is betting through loyalty, ease, and familiarity, these successful borrowers stick with them. The company is adamant that the digital tools and support it provides, all via a mobile phone, are exactly what previous defaulters and non-payers need to succeed on their platform. This is interestingly where the company first intersects with Paypal.

“We started LendUp because the traditional banking system wasn’t working for more than half of Americans. From day one, we’ve committed ourselves to offering better, safer and more transparent credit products and to aligning the success of our business with the success of our customers.”

As a digital payment option, PayPal has found a number of its customers are those that don’t have steady bank accounts, the normal nine to five jobs, or a steady address. It provides a reliable way to exchange money, send invoices, and collect fees. As PayPal serves these customers, its CEO Dan Schulman has voiced a desire to see customers thrive financially, in part by use of its digital payment platform.

Show Me the Money: Financial Incentive for PayPal

It is touching that PayPal and LendUp share a corporate vision, but rare would be the business deal done on this principle alone. PayPal also sees LendUp as a strategic partner in the digital world.

The industry of digital payment providers is crowded, and PayPal, one of the early-starters needs to stay ahead of competition. It has successfully tapped into eCommerce and become a go-to partner for a number of payment gateways, but there are other providers gaining market share. With this in mind, PayPal can use the data and collaboration of a startup like LendUp.

First, LendUp is automating essential parts of the lending process. Actions and decisions that people once felt belonged offline, are given a space in the digital world. This is essentially what PayPal did for direct payments. The tech savvy approach at LendUp pairs well with Paypal’s own business model.

Second, LendUp and PayPal share customers. As they are not direct competitors, this overlap provides a unique opportunity for both businesses to learn more about their audience and customer-base. Even if the digital companies aren’t sharing personal information, it is likely statistics, trends, and other data will be exchanged.

Lastly, LendUp is looking to take expand its business. The company seems to have a better grasp on personal loans, and in 2015 released its first credit card product. The card is directed at the underbanked and overlooked demographic of Americans. These individuals need a form of credit card to build their credit score. And LendUp is given them the option with a low credit limit. This moves closer to PayPal’s core business, and could provide the digital payment platform with its own opportunities for expansion in digital credit.

Discuss Digital Payments with 1Digital Agency

If you are interested to learn more about PayPal, its use for digital payments, and how it affects your eCommerce business, contact us.  1Digital Agency has retained a plethora of knowledge on the company and its competitors. We can connect you to the best eCommerce tools for using PayPal and other payment options on your Shopify, Magento, BigCommerce, and Volusion online store. See how our strategies have worked for eCommerce companies in the past through our customer testimonials.

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