PayPal is going after the big banks

It is precisely the kind of thing that keeps the bigbanks up at night: the Wall Street Journal reported this weekthat PayPalis quietly piloting a program that would allow users to open traditional chequing accounts.

The online payment processing firm is one of a few technology companies thinking aboutgetting into the banking businesswith a new modelthat could fundamentally alterour relationshipwith traditional banks and erode the simplest and oldest way they bring in new customers.

If you're a traditional bank, this is the stuff of nightmares.- Alyson Clarke,ForresterResearch

"If you're a traditional bank," saysAlyson Clarke, principal analyst at research firm Forrester, "this is the stuff of nightmares."

For generations, the bank's best pipeline fornew customers was the young people brought in by their parents to open their first account. The parents would take their kids to whichever bank they'd been using for years, and in mostcases, Clarke says, those young people would grow up and stay with that bank for the rest of their lives.

But that could be changing.

"A lot of consumers, particularlymillennials, think that all banks are basically the same," Clarke told CBC News. "And that old method of going into the branch to open your bank accountwith your mom or dad just seems completely antiquated."

Which is why PayPalis horning in on the big banks' turf at a time when they may be least able to withstand it.

PayPal's move

7 years ago

Duration 5:53

Alyson Clarke of Forrester on PayPal's gradual shift into traditional banking

For now, PayPalis only offering traditional banking services to a select group of its customers, whocan get a debit card to withdraw cash from ATMs, deposit chequesby taking a picture and have their pay slipsdeposited directly into their account.

Chief Operating Officer Bill Ready says PayPalis targeting those who don't have a traditional bank account. That would presumably capture some of those referred to as "unbanked" customers, but would certainly includethat younger generation that hasn't made an inauguraltrip to a bank branch yet.

"If you don't have a bank account, you can't take an Uber ride, can't stay in a room on Airbnb," he told the Wall Street Journal.

To do all this, PayPal has had to string together a lot of technology and a series of partnerships. PayPal itself doesn't have a banking licence in the U.S. so it hasteamed up with a handful of banks that do:debit cards from a bank in Delaware, cheque deposits through another in Georgia, and even loans from a bank in Utah.

Canadian options

For now, the pilot is only happening in the United States. But at least one expert saysthat model would be enormously successful here in Canada.

"Banks are not well loved in thiscountry," says ConorBill, managing director of investment firmMt. Auburn Capital.

"If you have a reliable alternative thatyou never have to establish a relationship with a bank, that is incredibly threatening to the [traditional]banks," he says.

Bill says the licensing issue would be manageable in Canada. He says there are enough alternative banks here with which PayPalcouldmake deals the wayit did south of the border. More importantly, he says,PayPal would find a keen and willing pool of potential customers.

Canadians love technology

"Canadiansare the fastest adopters of new payment mechanisms in the world," says Bill. "If someone can make it more convenient for us, we will drop our banking relationship as fast as you can snap your fingers."

Love of technology aside, Clarke says PayPaloffers itself as a fundamentally different kind of company and business model. At its core, she says,PayPalis laser-focused on consumers and customer satisfaction.

The same cannot always be said about banks. "Traditionalbanks [are]really stillproductsellers," she said."They're stillfocused on churning out product and makingtheirfees through those underlying products."

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Canada's big banks may seem monolithic. But pretend, for a second, that they had to compete for your business against a company likePayPal, which is offering you a bank account that lets you make deposits or withdrawals atATMsandis also linked to yourUberaccount, or one that makes it quick and easy to pay for a night's stay inanAirbnbrental.

Now imagine the next step. Picture Amazon which has also been in talks to offer traditional banking services to its customers offering you a bank account that comes with free music streaming, free video streamingand next-day deliveries of anything you buy.

Wouldn't you bank there?

Some less recognizable tech companies are also exploring new banking models, including apeer-to-peer money transfer service called TransferWise.

But (and there's always a but) these next-generation financial institutions will have to contend with the single biggest factor that keeps the big banks thriving:customerapathy.

Canadians love to complain about their banks, but very few end up walking across the street to look for a better deal. That's why PayPal's plan to target younger users has so many analysts so excited.

Just don't bank on anything changing overnight.