Square challenges banks in business loans

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But 95 percent of small business bank loans are secured, and half of them are for residential properties. New small business ombudsperson Bruce Billson said in March that banks’ over-reliance on asset security had corrupted loan ratings. Square will offer loans of up to $ 75,000 without collateral.

Square is expanding its merchant base by selling card payment receivers at outlets, including Officeworks, for $ 50, a rate much cheaper than that charged by banks for renting bulky terminals. Square has primarily targeted micro-businesses, but has recently gone upmarket with new point-of-sale software offerings that can be used for inventory and team management, as well as for online selling.

As players buy now, pay later – which used to use payments as an entry point for broader financial services – Square will now use acceptance of payments as a stepping stone to loans, just like in the United States. Its banking expansion follows American Express, which announced in February that it would launch business loans through its popular credit card offering.

It has been a difficult market to break into. Tyro has struggled for more than a decade to slowly gain market share in payment terminals against the big banks and regional banks, and its lending volumes are minuscule.

But Reserve Bank Deputy Governor Chris Kent said in March that bank lending to small businesses had stagnated over the past two years, with many SMEs struggling to access finance.

Square’s US lending operations, known as Square Capital, began five years ago and have provided more than US $ 8 billion to more than 435,000 small businesses. The default rate is around 4 percent of gross loans.

Three clicks and no paperwork

Samina Hussain-Letch, Head of Industry and Payments at Square Australia, said the San Francisco-based actor hopes to attract clients underserved by big banks, who demand “tons of paperwork and personal guarantees, even for small businesses “.

Jack Dorsey on the cover of AFR magazine in August 2018. The pace of Australia’s recovery from the pandemic prompted him to lend. James brickwood

Many small businesses are unwilling to provide security like the family home and find the application processes cumbersome. Square’s loans will involve three clicks and no paperwork, she said.

Square declined to disclose the dollar range of its loan charges. These will be fixed, based on the business risk profile assessed by Square using the payment data.

An available dynamic line of credit will be presented to business owners on their Square dashboard. The seller will pay the fees from a predetermined fixed percentage of sales, with payments made daily. The fees will not change during the term of the loan and are specified in advance.

While no personal collateral is required for financing up to $ 75,000, Square will take collateral to lend up to $ 250,000 to certain customers and will provide loans starting at $ 300. This brings Square to the turf of bank-issued credit cards for small businesses, which can charge 20% annual interest rates.

“It is not about offering high risk loans but is based on responsible lending for sellers,” Ms. Hussain-Letch said. Small business loans are not regulated in Australia.

Tyro offers a similar product that charges its terminal customers a fixed fee, not an interest rate, for loans whose repayments are also based on a proportion of sales. The big banks do not offer this type of product and remain committed to charging annual interest rates on balances and overdrafts.

Tyro became an APRA regulated bank in 2015. At least for now, Square has no plans to become a regulated depository body in Australia – although it is now a bank. in the United States, with Square Financial Services based in Salt Lake City. Square Capital loans are now issued by his bank; previously, they were issued as part of a partnership with Celtic Bank, another Utah-based lender, American banker reported on March 1.

In Australia, loans will be funded on Square’s local balance sheet, not the US bank. It operates under an Australian Financial Services License issued by ASIC.

Ms Hussain-Letch, who previously worked for Visa for eight years, said becoming an Australian Authorized Depositary Institution (ADI) “is not in the plans” in the short term. “It took a lot of work in the United States. The barriers to entry are lower in Australia and this is something we could consider when the time is right. “

Mr Dorsey is excited about Square’s prospects in Australia, she said. He has doubled the size of his home team over the past year to 150. “We are doing very well,” said Ms Hussain-Letch. “Australia is now recovering from COVID and the timing to make this loan offer now has been extremely intentional. “

Square is listed on the NYSE with a market cap of $ 120 billion, the same size as the Commonwealth Bank, valued at $ 155 billion on the ASX. Mr. Dorsey’s other business, Twitter, is valued at $ 55 billion. Square shares rose 27% in April.


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