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April 14, 2020, 6:03 p.m. EDT

Square and PayPal finally have a chance to prove they can beat the banks

The fintech companies were approved for Paycheck Protection Program lending through the SBA

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By Emily Bary


Bloomberg News
PayPal is among the fintech companies approved by the Small Business Administration to distribute Paycheck Protection Program loans.

This is the chance that fintech companies have been waiting for, says BTIG analyst Mark Palmer.

With many small businesses in crisis mode as the COVID-19 outbreak rocks the U.S. economy, PayPal Holdings Inc. /zigman2/quotes/208054269/composite PYPL +1.21% , Square Inc. /zigman2/quotes/205989440/composite SQ +0.56% and Intuit Inc. /zigman2/quotes/203136605/composite INTU +1.85%  have been approved by the Small Business Administration to distribute Paycheck Protection Program (PPP) loans. Palmer thinks the designation gives the companies a big opportunity to prove that they’re better equipped for lending than traditional banks because of their quickness and reach.

Watch: How automated digital payroll will change the way employees get paid

“We believe PayPal, Intuit, and any other fintech firms ultimately approved to participate in PPP will be able to demonstrate the speed and efficiency that arise from algorithmic capability and the streamlining and automation of loan origination, underwriting, disbursement and servicing,” he wrote Sunday. Since then, Square Capital Lead Jackie Reses announced on Twitter that Square has also been chosen to participate.

The companies may also be able to better reach businesses that don’t rely on banks for lending, Palmer argued. He cited SBA statistics indicating that more than 25 million of the 30 million small businesses in the U.S. are mainly one-person operations with no W-2 employees and average annual revenues below $50,000. These businesses are less likely to have banking relationships, Palmer said.

Opinion: 3 ways to ensure SBA aid for small businesses helps those who need it most

It’s worth noting that even though the fintech players see advantages of their data-driven lending decisions relative to what the big banks offer, they aren’t completely going it alone. Both PayPal and Square work with bank partners on their lending programs.

In addition to boosting their profiles through participation in the program, PayPal and Square will likely recognize nice margins from their involvement, said Barclays analyst Ramsey El-Assal. The SBA gives lenders 5% for loans under $350,000 and offers a smaller percentage for larger loans, but he expects the “vast majority” of PayPal’s and Square’s loans will be small enough to earn the companies the 5%.

Though there are some operational costs to the program, PayPal and Square may also be able to automate “most of the work,” he wrote Tuesday.

BTIG’s Palmer said that “some fintech firms, especially those with higher costs of capital, have not sought to participate in PPP as they have not been able to make the numbers work given the economics,” but that he thinks PayPal can use its involvement as a customer-acquisition vehicle.

Another opportunity comes on the consumer side. Both PayPal’s Venmo and Square’s Cash App are allowing individuals to receive their stimulus checks through their platform, an option that’s available even for consumers who don’t have bank accounts. About 20% of taxpayers, or roughly 28 million people in the U.S., don’t have bank accounts, Palmer said.

Don’t miss: Square downgraded at UBS on concerns of ‘deteriorating spending’

PayPal shares are up 1.5% so far this year, while Square shares have dipped 0.3%. The S&P 500 index /zigman2/quotes/210599714/realtime SPX +1.40%  has lost 12% in that span.

/zigman2/quotes/208054269/composite
US : U.S.: Nasdaq
$ 191.32
+2.29 +1.21%
Volume: 7.94M
Aug. 12, 2020 4:00p
P/E Ratio
87.80
Dividend Yield
N/A
Market Cap
$221.79 billion
Rev. per Employee
$710,138
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/zigman2/quotes/205989440/composite
US : U.S.: NYSE
$ 139.02
+0.77 +0.56%
Volume: 10.60M
Aug. 12, 2020 4:00p
P/E Ratio
232.13
Dividend Yield
N/A
Market Cap
$61.33 billion
Rev. per Employee
$984,824
loading...
/zigman2/quotes/203136605/composite
US : U.S.: Nasdaq
$ 304.75
+5.55 +1.85%
Volume: 813,950
Aug. 12, 2020 4:00p
P/E Ratio
60.21
Dividend Yield
0.70%
Market Cap
$78.02 billion
Rev. per Employee
$722,584
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,380.35
+46.66 +1.40%
Volume: 2.25B
Aug. 12, 2020 5:10p
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Emily Bary is a MarketWatch reporter based in New York.

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