PayPal may not be trying to become a merchant's bank in providing working capital and next-day settlement on fund transfers, but the payments unit of eBay Inc. is trying to make it harder for its merchants to consider another provider.

After months of testing, PayPal unveiled its Working Capital program for merchants in March and is testing a Next-Day Settlement offering, both with the same goal of "improving merchants' cash flow," says PayPal spokesperson Juliet Niczewicz.

PayPal has been working with its banking partners to "optimize processes on both their end and ours so we can offer Next-Day Settlement," Niczewicz says. As such, the next-day process allows a PayPal business to transfer money from their PayPal account to their bank account, she adds. "A big focus at PayPal is how we can be a better business partner to the merchants we work with." 

That premise is the core value for any payments company dipping its toe into cash advances, loans or faster payment settlements, says Thad Peterson, senior analyst with Boston-based Aite Group.

"The underlying theme here is trying to find hooks into the retailer so that the barrier to changing providers is more difficult," Peterson says. "But I also think it has to do with creating a value proposition that is differentiable to the degree it can be."

But PayPal has a history of stirring the payments pot to the point competitors take notice, says Maria Arminio, president of Avenue B Consulting Inc., a Redondo Beach, Calif.-based payments management consulting firm.

"PayPal's behavior is such that they really look to be a disruptor, anything they can do to cause a stir is a good news thing," Arminio says. "If a provider like PayPal can make funds available to benefit a merchant's bottom line, that's a compelling offering."

Coupling options for needed funds with reasonable pricing for their processing fees can give PayPal an edge when merchants are comparing providers, Arminio adds.

PayPal does not share information about how it determines merchant eligibility for next day settlement or working capital, Niczewicz says.

But clearly a merchant's track record with PayPal and use of PayPal accounts comes into play. "All of that immediate availability of funds is really just a function of the risk profile they are willing to accept," Arminio says.

Many organizations playing in the cash-advance or loan space "are using a good funds model in order to provide customers with the appearance of same-day settlement capabilities," Arminio says.

"It's certainly important to the merchants sitting on the end of that," she adds.

Square began offering Square Capital, a program similar to PayPal's Working Capital, in May. Similarly, CAN Capital recently introduced CAN Connect, a set of application interfaces that allows payments providers to include links that provide instant quotes for merchant clients to access cash advances and loans.

These moves create a merchant services arms race among payment providers. "It's getting easier and easier [to switch providers] as everything is moving up to the cloud," Aite's Peterson says. "There are fully integrated systems out there and systems that link into relatively generic hardware."

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