Square to Offer Bank Loans

by Raymond Pucci 0

Who says the payments industry is staid and risk averse? Square just announced they are getting into the lending business by offering loans as an additional service to its payments customers. Reaction so far appears to be mixed as seen from the following article.

Square Inc. is creeping further from Silicon Valley and closer to Wall Street.

The company said Thursday it hopes to speed its path to profitability by offering loans through a partner bank as an add-on service to its core payments business.

Square’s shift to more closely resemble other online lenders comes at a tricky time; despite fast revenue growth, the market values of financial-technology firms such as LendingClub Corp. have fallen over the past two years. One reason is that investors and analysts are less often valuing them purely as Internet companies, which tend to trade at higher prices relative to their revenue growth.

Payments firms getting into lending “is a natural extension of the business,” said Sanjay Sakhrani, analyst at Keefe, Bruyette & Woods, Inc. But, he said, “if you survey the investment community, they tend to think doing more lending” is a drag on the stock valuation and not a boost for it.

Square will offer the loans to small businesses that use its payment devices, with fees of around 10% to 16% of the amount borrowed. The loans will be paid back by Square taking a cut of each transaction, typically around 10%. Unlike a cash advance, which is open-ended, the loans must be repaid within 18 months and can be repaid early. The typical cash advance is repaid in nine months, Square says.

Square’s small business customers can currently get cash advances, which reached $400 million on 70,000 transactions in 2015. While the new loans will be originated by Celtic Bank in Utah, Square is joining the ranks of the online lending marketplace and firms such as Lending Tree and Prosper. The thinking by Square is that they have a ready-to-go database of existing customers in need of short term loans. Also, they have a wealth of existing transactional data on their customer-borrowers which should make credit decisions faster and less risky. Whether the timing is right or not, Square is looking for new revenue streams to satisfy investors after its November, 2015, IPO. Watch for the regulatory watchdogs to bite into this crowded, but basically unregulated market.

Overview by Raymond Pucci, Associate Director, Research Service at Mercator Advisory Group

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