Square Capital Grew 68% YoY by Not Competing with Banks

Square is competing with friends and family, not financial institutions, to grow its lending arm, Square Capital.

The payments processing startup grew loans at Square Capital by 68% year-over-year this quarter, according to CEO Jack Dorsey on the company’s earnings call yesterday. This figure represents $318 million in loans to almost 50,000 sellers on the Square network.

In 2Q16, Square Capital facilitated about $189 million in loans, while it recorded $251 million in loans in 1Q17, up 64% from the year prior, according to the company. Loss rates have held steady at about 4%, CFO Sarah Friar noted.

The trick to this growth? Keeping those loans tailored to the merchant’s needs, said Square CEO Jack Dorsey during the company’s earnings call yesterday. Dorsey also talked about the competition:

Our interests are aligned with our sellers’, we want to provide a loan amount that is appropriate and we’ll help them grow, not burden them with a loan that is too large.

You can see this in our average loan size of $6,000. We’re not competing with financial institutions. We’re creating a new market where previously the only other option for a seller was asking for a loan from friends or family.

Focusing on these types of “manageable loans” may mean Square isn’t competing with banks, or even with many of the emerging marketplace lenders, but that doesn’t mean its only competition in the market is the friends and family of a Square merchant. Payments provider PayPal also provides financing to small businesses, and announced in May that it had recorded $3 billion in loans to 115,000 small businesses since its inception.

PayPal’s lending arm was launched in 2013, Square Capital in 2014.

As well as continued growth in loans, Square reported $16.4 billion in gross payment volume, up 32% over last year.

Additionally, the company is seeing an increase in revenue with its Square APIs . Said Friar:

I think as well within the take rate there is also of course the higher growth of products like Virtual Terminal, Invoices, and our newer Square APIs as part of our Build with Square platform, all of which have a slightly higher revenue rate than our core 2.75%. So, there is a nice balance going on there and we’re very pleased with the outcome.

Square also reported good adoption of products such as its Square Cash Card, which, according to company statements, “shipped as many units as we did in the first eight months of the original Square Reader” in its first month of availability.”

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