Platforms Use Payments Data to Push Deeper Into Merchant Credit

A merchant that once represented a stream of transaction fees can now represent a lending relationship, and second-quarter earnings results show payments platforms putting more money behind that proposition.

Block and PayPal and others already have a financial relationship with businesses, where lending extends that relationship into working capital and creates revenue that does not depend solely on another transaction crossing the payments network.

At Block, Square provides a telling example. Square processed $72.8 billion in gross payment volume during the second quarter, up 13% from a year earlier. Block said its fastest annual growth remained among mid-market sellers with more than $500,000 in annualized GPV.

Some of those sellers are also Square borrowers. Square Financial Services originates Square Loans to qualified sellers. Block sells most of the loans to third-party investors and retains a portion. Per its most recent quarterly filing, during Q2, it sold $1.2 billion of Square Loans, up from $1.1 billion in the same period last year. Gains on those sales rose to $69.1 million from $62.3 million. That is a 9% annual increase in loans sold and an 11% rise in the associated gains.

Block also said Square’s financial solutions growth was driven by Square Loans. The financial solutions monetization rate, which measures gross profit from Square Loans, Instant Deposit and Square Card against GPV, rose to 0.41% from 0.38%.

PayPal provides another view of the widening economics of an existing merchant account. According to its most recent quarterly filing, its merchant loans, advances, interest and fees receivable, net of participation interests sold, totaled $1.9 billion as of June 30, 14% above the $1.7 billion reported a year earlier. PayPal attributed the increase principally to approximately $140 million of growth in its U.S. PayPal Business Loan portfolio and about $100 million of growth in PayPal Working Capital, primarily in Germany.

Working Capital Moves Closer to Payments

The attraction of merchant lending for a payments company begins before a loan is made. Payments providers already have distribution. Their merchants have accounts, use their technology and generate a record of commercial activity. A credit offer can therefore be placed inside a relationship that already exists rather than sold to an unfamiliar borrower.

Elsewhere, pure play lenders indicate burgeoning demand by small firms for credit. As Enova reported in its most recent quarterly filing, the company saw $1.6 billion in small business originations or acquisitions in Q2, up 29% from $1.24 billion a year earlier.

Small business interest and fee revenue reached $439.3 million during the quarter, up 34.6% from $326.3 million a year earlier. More strikingly, Enova’s quarterly small business originations were more than twice its $671.7 million of consumer originations.

The PYMNTS Intelligence report “The Emerging Middle Market: How Middle-Market Businesses Pay, Borrow and Scale” showed why merchant credit has become a larger part of the payments relationship. Among emerging middle-market businesses with $1 million to $50 million in annual revenue, roughly 70% to 81% of businesses prefer faster, more flexible access to credit over a lower interest rate. For payments platforms already sitting between merchants and their daily sales, those preferences create an opening to compete on access and speed as well as the cost of capital.

The convergence, then, is occurring from both sides. Digital lenders are pursuing more small business volume while payments companies are adding credit to merchant relationships that they already control. The Q2 results suggest that merchants are providing enough demand to sustain those efforts.