A new generation puts its trust in tech over traditional banks

Tech companies may have an advantage when it comes to assessing credit worthiness and keeping costs low, at least in the case of Square.

The digital payment company, whose stock is up a whopping 229 percent in the past year, launched Square Capital in 2014 to issue small business loans that average in size around $6,000. Americans typically rely on friends or family to borrow that amount instead of going to a bank.

Square lends to the retailers that are already using its credit card processing or payroll services, giving it an advantage when it comes to data. The company has a machine learning model that factors in credit card transactions among other things to decide whether or not to issue a loan.

If a coffee shop borrows $1,000 for a cappuccino maker, for example, a fraction of every purchase at that location is automatically taken to pay back the loan. Square also gives its users projections, “in plain English,” for when they might be able to pay it all back.

“Our product is almost entirely automated,” said Jacqueline Reses, the head of Square Capital who was a partner at private equity firm Apax during the height of the financial crisis. “Our payment data is a core part of our modeling. Most lenders don’t have that data available, and that creates incredible differentiation.”

“If you can translate fees into something that’s easy and understandable, people trust it,” Reses said.

It’s not just Square moving into the small business space. PayPal, which was once a part of eBay, has a program called Working Capital that makes loans to merchants based on sales history. Amazon also does this for sellers, and began extending credit to small business owners in 2011. It uses sales data to trigger invitations for loans that could boost growth.

Despite more competition, credit availability continues to be an issue for smaller merchants. Heading into this year, small businesses reported stronger revenue growth and profitability but still struggled to get loans to pay operating expenses and wages, according to the Federal Reserve’s 2017 Small Business Credit Survey. As many as 70 percent of merchants didn’t receive the funding they wanted last year, the report said.

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