Squaring the Square Model

As Merchant Service Providers (MSPs) continue to look for new ways to address the needs of small and medium sized businesses (SMBs), the tricky thing that they contend with is how to best offer financial services to merchants of various shapes and sizes.

As small and medium sized businesses (SMBs) have multiple and evolving financing needs for working capital and growth, it might be fine in the beginning to offer one kind of loan product, but what happens when those needs change? What should MSPs do to change with them?

Squaring up the Market

A good example of this dilemma is Square Capital, the lending arm of the popular POS/credit card processing service provider Square. Since its founding in 2009, Square has steamrolled towards growth in the space by offering merchants the ability to swipe cards via a simple, easy-to-use device. Initially, it serviced mostly micro-businesses where the market penetration was easier and when they could market products considered as a critical solution to this audience.

Square Capital launched several years later in 2014 based on the premise that Square, as a merchant acquirer and provider, would leverage card charge volume data to lend against. Another way to put it is that Square Capital leverages a merchant’s credit card data to underwrite loans against that business’ future receivables—which is not a new idea and many other merchant acquirers/processors have tried to do this multiple times. It’s also better known as a merchant cash advance.

The brilliance and the difference with Square Capital, however, comes in how it delivers loans to micro-businesses. Given the relatively small loans they offer ($1,000 to $10,000), Square Capital can present its loans and fulfill them in a digital only, frictionless way directly to Square users in a timely fashion. Launching Square Capital and its other complementary services fundamentally changed the company from a merchant acquirer to a merchant services aggregator.

While Square has made all the right moves to gain the prominence it enjoys in the space, it now faces an issue many other MSPs face as well. In order to scale, it needs to continue listening to its evolving merchant base to learn what they and the market needs.

While the current Square Capital lending model has been successful using point-of-sale data from its POS clients to offer loans and collect payments from their cash receipts (as noted here), this type of approach might not be enough to service merchants’ capital needs as these customers continue to mature. Even as Square confidently moves upstream into new merchant segments, a digital-only solution will not be enough for continued, exponential growth.

One-Size-Fits-All Does Not Fit All

Merchants are strapped for time and for access to capital, something Square and other MSPs have been mindful of when providing capital in a frictionless way. For continued growth, MSPs need to deliver financial servicing and not simply a financial product. The no-touch experience is a critical one in our digital age, but in business lending it will only take a lender so far. For example, companies such as NerdWallet and CreditKarma have experienced firsthand how SMB lending is very different from consumer lending, as its complexity requires solutions and robust customer service, something that a one-size-fits-all loan solution does not provide to these kinds of businesses.

Providing a digital, seamless data-driven solution coupled with bespoke-style customer service for SMB loans is a complex process that takes years to implement. It is not the actual implementation that is the hurdle, but rather optimizing the process in a way that is not cost-prohibitive nor hinders profitability. 

What is the best way to bring this model of service to fruition? There are several options to follow including:

• Build it from scratch: A larger, well-funded company like Square could build out a large, human customer service department that can specifically handle customized loan offerings that appeal to growing SMBs. The issue is cost, and the resources needed to build a well-trained team of loan specialists—these businesses require multiple product options diversified across all merchant credit risk profiles, as well as education around the options that best support their business goals.
  
  They require short- and long-term solutions, as well as advocacy and flexibility. This means that not only would Square have to hire the right staff, but they would also have to be well-trained to handle a variety of customer scenarios and multiple loan products. Even for a company of this size, this type of team could not be built and trained overnight, particularly in the current U.S. job market.

• Partnerships: By partnering with an established provider of small business loans, an MSP can alleviate the stress and the cost of building a loan/customer service team from scratch. More so, it could be beneficial for both sides of the partnership, as the MSP can now offer more complex loan options for its growing merchant base while the SMB loan provider can have access to a new base of customers, all of which are loyal to the MSP brand.
  
  A good fintech example of this is when Hulu recently announced a partnership with Venmo to become the first streaming service to offer the popular P2P app payment service a billing payment option. While the latter specialties in frictionless mobile payments, it joined forces with a popular OTT media company, thus providing new, non-competing services to a combined customer base - one anchored in similar interests and demographics.

Squaring Square

For Square and other merchant service providers to achieve long-term success and cater to an ever-diversifying customer base, it will need to provide a data driven, digital solution coupled with white glove customer service. This model takes time to perfect, but when done right, it can square the Square model.