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Jonathan Camhi
Jonathan Camhi
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Could Square Change the Commercial Loans Game?

Square’s new commercial loans program shows how new entrants can compete with banks with data and analytics and simplified experiences.

Although Square is often mentioned among the serious new players now competing with traditional banks, the company has struggled, losing $100 million last year. Making a profit in payments is not easy, given the thin margins involved, and yet there is so much innovation going on in the space. Square took the next step this week in expanding its business beyond payments to commercial loans based on the significant foothold it has already gained in processing card transactions for merchants.

With payments, it’s not the transaction that you want, it’s the transaction’s data. This is why there’s so much innovation happening in a market that offers such thin profit margins. Companies want that data to find new ways to disrupt commerce and gain new customers. In Square’s case, it is now using the transaction data it gets from its merchant customers to determine if they can qualify for a cash advance.

[For More on Disintermediation in Payments: Banks Can Thrive in the New Payments World]

This is an important point: Square will come to the merchants with a cash advance offer, rather than having the merchant apply for the advance. The data that Square has collected from the merchant will help it determine the terms of the loan, giving Square greater confidence that the merchant will be able to repay, even though there’s no application and approval process.

That application and approval process that banks have relied on for years to determine creditworthiness is the first pain point Square is trying to solve in commercial payments. The other reason there is so much innovation happening in payments is because there’s clear pain points to be solved in the market.

And there are clear pain points in traditional commercial loans through a bank. Applying for a loan from a bank can take months and can involve mounds of paperwork. For a small merchant it can be a huge hassle. Imagine how much easier it would be to have the loan provider come to you with an offer that you’ve already been vetted for. And Square claims it can offer next delivery of funds once the loan offer is accepted.

Matthew Panzarino of TechCrunch spoke to a couple of merchants that had received cash advances in the pilot for Square Capital, the new commercial loans program. “It was much easier to get than a traditional loan,” Darren Scott of Zero Friends, one of the merchants, related. “Everything was straightforward and easy to understand.”

That simplicity that Scott talks about is seriously lacking in today’s typical loan process. And providing simple terms for financial products has helped other non-banks succeed in financial services, like Bluebird.

The other pain point that Scott mentions in the TechCrunch article that Square Capital solves is the pain of actually paying the loan back. Instead of charging a flat payment each month like a bank would, Square will take a percentage out of each credit card transaction it processes for the merchant for repayment of the loan. This means that if sales are down, the merchant doesn’t have to struggle to meet that flat monthly payment. They pay back what they can according to their sales, which also incentivizes the merchant to encourage customers to pay with their card rather than cash.

Whether this will significantly improve Square’s business is anyone’s guess. But the move shows how new entrants in financial services can leverage data and analytics to solve traditional pain points for customers and build strong relationships with customers that used to go to a bank for financial products and services.

Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio

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