PayPal thinks it has the answer for small business lending in Australia

It also sees identity verification as the biggest value of the Consumer Data Right.

PayPal has provided AU$500 million to 7,000 businesses in Australia since it launched a working capital offering less than five years ago alongside Citi.

"We can see that there is an ongoing demand for alternative finance solutions to support small businesses and help them thrive," PayPal said in its submission [PDF] to the Select Committee on Financial Technology and Regulatory Technology.

PayPal considers "information asymmetries" having previously been a "tremendous" challenge in traditional credit scoring.

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"Most of the data involved in calculating a traditional credit score came from traditional financial institutions," it wrote. "Lower income, younger, and minority consumers and small businesses often lacked the prerequisite paper trail to document their historical payments and credit flows, and therefore were considered risky lending propositions."

It said alternative data elements however, have enabled lenders to say "yes" in cases where previously they would have been unable to do so.

The company also believes the creation of a secure, government-issued digital identity framework linked to an electronic know your customer (KYC) could improve the ecosystem for onboarding, authentication, and verification for electronic payments.

PayPal said it is "encouraged" by the efforts underway in Australia by the Digital Transformation Agency (DTA) in this space and said it would like to be engaged with the rollout of the function.

"The lack of a secure, reliable, digital identity framework poses a significant barrier to more efficient online interactions and economic participation by citizens least able to overcome those barriers," PayPal continued.

"The fact that dozens of institutions are forced to repeat the same identity verification activities, for the same person, across multiple platforms to satisfy anti-money laundering, sanctions monitoring, and fraud risk management obligations is a material drain on economic resources."

See also: Austrac orders financial crime compliance audit of PayPal Australia

It also believes the biggest benefit of the open banking regime, under the Consumer Data Right (CDR), is that banks will be obliged to share the outcome of identity verification assessments, providing the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (the AML/CTF Act) allows for it.

"PayPal believes the sharing of data to confirm identity for the purposes of regulatory obligations should be permitted to be securely and confidentially shared between institutions," it told the committee, saying such activity will limit customer inconvenience and improve efficiency of identification procedures for all financial service providers.

Following the audit ordered by Austrac, Australia's financial intelligence and regulatory agency, into PayPal compliance with financial crime laws, the company said risk and security became the heart of everything it does.

"We strive to be a trusted player by our regulators as a company that embraces our regulatory responsibilities and always does right for our customers," it said. "These responsibilities include taking serious measures to combat money laundering and related financial crimes, which can be an issue in the small business financing space."

PayPal said it uses data analytics, machine learning, and virtualisation to detect suspicious behaviour within 15 milliseconds and prevent cybercrimes.

It said each day it processes over 3.1 million transactions globally -- $20,705-worth of payments each second.

As the committee is currently probing the opportunities presented by fintech and regtech, PayPal offered suggestions that it believes would support the success of the industries in Australia.

"In the world of pervasive, rapid development of fintech and regtech, Australian regulators should focus on activity-based regulation, rather than entity-based regulation," it said.

"This means that anyone providing a payment service is subjected to the same regulatory regime, no matter what the entity is, or what the business model is. Activity-based regulation is business-model neutral."

PayPal said Australia should also consider a risk-based proportional authorisation, which it said means rules and regulations applied should be relative to the level of risk of a service.

PayPal has 8 million active accounts in Australia.

For 2018, the company's Australian operations produced AU$9.5 million in after-tax profit, with the "rendering of services" seeing PayPal produce AU$594 million in revenue.

The company earns transaction fees from processing transactions for customers. Revenue resulting from a payment processing transaction is recognised once the transaction is complete, PayPal explained in its financial results.

It listed AU$534 million of its AU$594 million revenue as the total cost involved in providing such services for the year.

Globally, PayPal reported revenue of $15.45 billion for 2018.

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