Payments company Square is moving into new markets by issuing business loans and will soon move to consumer lending. Its data collecting and analyzing algorithms are deciding creditworthiness letting borrowers arrange their loans in a few taps.
According to WSJ reporting, one Texan food truck owner accepted a loan offer within the Square app, then went on to borrow $150,000 to open a gastropub.
The borrower, Billy Joe Wilson, already used Square devices to process the credit card payments for his business. Square’s algorithms had been watching the transactions and monitoring sales before offering the loan which Wilson accepted with a few taps in the Square application. Wilson received the funds within a few days.
Agile Fintechs vs Slow Conventional Banks
The case is a prime example of how quickly fintech is progressing and a case study of how firms like Square are beginning to outpace conventional banks which are bogged down by their size, bureaucracy, and technology lag. Fintechs are agile, beginning from a technology base to offer financial services that meet the pace expected by tech-savvy generations.
Restaurant-owner Wilson wasn’t expecting the loan offer, nor did he expect arranging the loan to be so easy:
It’s either one of those things that are too good to be true or it’s going to require a lot of time and effort where it’s not worth it for me.
Square Capital, Square’s lending arm, formed in 2013 driven by customer feedback. Noticing a gap where small business owners struggled to prove their credit, Square Capital has now awarded over $3.5 billion in business loans.
Square is now moving into consumer lending, exploring ways to offer loans to the seven million and more users of Square’s Cash App. Any service provision here is likely to use the same algorithms and machine learning to track user’s activity before deciding creditworthiness. For Square’s business users a past Medium post by Square illustrates just how they are targeted:
“We can also utilize Square data and machine learning to help our sellers find the best Square products for their business. We have a data science team devoted to using domain knowledge and feature engineering to predict a seller’s likelihood to use any given suite of Square product offerings.”
Square has also recently filed paperwork to open a bank in the U.S state of Utah to offer business loans and deposit accounts to businesses and consumers. It would be classed as an “industrial loan company” which can operate without Federal Reserve oversight but would give Square the ability to offer fiat deposit accounts which are insured by the federal government.
Another growing fintech, Robinhood, launched checking and savings accounts offering 3% interest rates this month, immediately drawing scrutiny from conventional banking organizations as the accounts do not have Federal Deposit Insurance Corporation (FDIC) Coverage.
Square’s new market penetration doesn’t stop with business and consumer lending. After adding bitcoin-buying functionality to the Square Cash App, the app has now overtaken leading cryptocurrency exchange Coinbase to become the most used iOS app for buying bitcoin (BTC). The app is also now the top free mobile application for iOS in the U.S, showing its growing user base.