Platforms Use Payments Data to Push Deeper Into Merchant Credit

Payments platforms are leveraging payments data to deepen their engagement with merchants, extending their lending relationships beyond mere transaction processing. Companies like Block and PayPal have expanded their financial offerings to include merchant loans, advances, interest and fees, creating new revenue streams that don't rely solely on transaction volume.

At Block, Square processed $72.8 billion in gross payment volume in Q2, marking a 13% increase year-over-year, with the majority of this growth coming from mid-market sellers with annualized gross payment volume exceeding $500,000. Square also provides Square Loans to eligible sellers, selling most of these loans to third-party investors while retaining a portion.

In Q2, Block sold $1.2 billion in Square Loans, up from $1.1 billion in the same period last year, with gains on these sales rising to $69.1 million from $62.3 million. PayPal's latest quarterly filing reveals a 14% increase in merchant loans, advances, interest and fees receivable net of participation interests sold, totaling $1.9 billion as of June 30.

This growth is primarily attributed to growth in PayPal Business Loans in the U.S. and PayPal Working Capital in Germany. Payments providers already have a foothold within merchants' operations, providing a ready-made distribution channel for lending relationships. This allows them to offer credit within existing merchant accounts, avoiding the need to acquire new borrowers.

Meanwhile, lenders are also experiencing significant demand from small businesses, with origins or acquisitions reaching $1.6 billion in Q2, a 29% increase from the previous year. Enova's small business interest and fee revenue grew by 34.6% to $439.3 million during this period, with small business originations accounting for more than twice the consumer origins.

The PYMNTS Intelligence report "The Emerging Middle Market" highlights that a significant portion of emerging middle-market businesses prefer faster, more flexible access to credit over lower interest rates. This shift in merchant preferences allows payments platforms to compete not only on cost but also on access and speed, as they already hold a central position between merchants and their daily sales.

In conclusion, payments platforms are capitalizing on the growing demand for merchant credit by integrating lending services into their existing merchant relationships, leveraging their existing data and distribution networks, and aligning with the evolving needs of both merchants and lenders.