388 Part Three Key System Applicatie INTERACTIVE SESSION TECHNOLOGY Small Business Loans from a FinTech App banks which are funded by low-cost deposits. To Billy Joe Wilson, owner of Billy Joe's Craft House in Port Aransas, Texas, was cooking up some chicken avoid the regulations required for a conventional bank Square outsources the more regulated parts of fried steak sandwiches in a food truck when an app on his tablet asked if he wanted to borrow $5,000. lending (such as the ability to offer loans at uniform rates and terms nationwide). That enables Square to vices that Wilson and other small businesses use to The offer came from Square, Inc., which makes de operate as a niche financial institution that can offer process customer credit card payments. As Wilson banking services that regulated banks can't offer was using Square to process payments Square's algo without oversight from the Federal Reserve rithms had been working quietly behind the scenes Square evaluates whether a business can quality to determine whether he was creditworthy Square's for a loan by analyzing its vast database of credit card system felt he was with a few swipes, Wilson then transactions. It looks at data on whether a business is attracting repeat customers, the number of charge. accepted Square's loan terms and received his loan within days. Since then Wilson has borrowed more backs, business history, and processing volume. The than $150,000 to open a nearby gastropub lending process is automated, and makes it easy for Tech firms such as Square are moving onto the customers to obtain and repay a loan. Most custom- turf of traditional banks, not only with online pay. ment services but also in the banks' core business of Application only takes a few clicks, with no long ers are not required to fill out a formal application. loans. The tech firms are able to take advantage of their vast troves of customer data. PayPal Holdings, forms. Upon approval, the business loan is deposited into the borrower's bank account as soon as the next for instance, has made more than $6 billion is small business day. Square takes a percentage of a com- business loans since 2013, using data it collected while processing payments for Internet retailers. puny's daily credit card sales as loan repayments. Amazon has loaned more than $3 billion to indepen- Instead of charging interest, Square levels a flat fee dent merchants that sell goods on its site, using sell Tanging from 10 to 16 percent of the loan amount ers' historical volumes as a basis for granting credit (A $10,000 loan could have fees ranging from $1,000 In 2017, Intuit started offering loans to businesses to 51,600.) The loan is supposed to be repaid in full using its Quickbooks accounting software with data within 18 months from their accounting statements. Other nonbank Not all businesses are pleased with Square's online loan providers include LendingClub Corp. machine-driven lending. Hardcore Sweets Bakery in OnDeck, CAN Capital, PayPal Working Capital, and Oakville, Connecticut an alternative" cupcake shop Kabbage borrowed more than $130,000 from Square between Square has extended more than $3.5 billion in 2014 and 2018 to purchase more kitchen equipment loans and cash advances to small businesses, and is and open a second location. According to co-owner now moving into consumer lending. It will loan up Nicole Braddock, Square has stopped making loan of to $100,000 to businesses that use Square Square is fers to the bakery but wouldn't explain why. No one also exploring services for personal loans and lines from Square's customer-service team would return of credit to the more than 7 million users of its Cash her phone calls, and she got only a generic response App digital money transfer service that competes to her emails. Sometimes a more personal touch is in with Venmo. order In the 12 months ending on September 30, 3019, There are other tradeoffs. The price for the speed Square extended about 200,000 business loans, more and convenience of online lenders is interest rates than three times the number of loans from banks via Getting Better Fitness in Chicago had to pay 25 per- higher than those charged by banks. For example, the Small Business Administration. But Square is still a small player in lending, with its business loans av- cent interest on a short-term loan from Kabbage. eraging $6,500. This is much smaller than the typical from PayPal Working Capital. Tea By Two, a Bel Air The gym later switched to 11 percent financing bank loan Square loans are funded by investors, so they Maryland tea room, recently paid an 18 percent in charge higher interest rates or fees than loans from terest rate on a $20.000 loan from OnDeck. Online lenders, however, are more likely to grant loans 389 Chapter 10 E-commerce: Digital Markets, Digital Goods and to do so much more quickly than conventional banks, often without requiring collateral. This is es- pecially appealing to first-time business owners. Rapid Brewing of Homewood, Illinois, recently took a loan from Square Capital when it needed an emergency plumbing repair . The company received its loan of S7,800 within a day. Rapid Brewing's loan terms called for Square to keep 14.8 percent of daily credit-card sales to repay the principal, and the loan had to be repaid within 18 months, Instead of interest, Square charged a flat fee of $1,008. Brewery Co-owner Raiye Rosado believed that while her ex- perience of obtaining a loan from Square was largely positive, she would probably use a traditional bank for larger loans. Sources Chloe Goodshore, "Square Capital Review: Merchant Cash Advances by Another Name." business.org, March 19, 2020; Becky Yeruk, "Some Small Businesses See Big Benefits in Online Financing Wall Street Journal, May 12, 2019; www.squareup.com, accessed July 13, 2019, and Peter Rudegeair A $150,000 Small Business Loan- from an App." Wall Street Journal, December 28, 2018. CASE STUDY QUESTIONS 1. What distinguishes the FinTech services described in this case from traditional banks? Explain your answer 2. How do the financial services described here use information technology to innovate? 3. What are the advantages and disadvantages of small businesses obtaining loans from FinTech services? 4. If you were a small business, what factors would you consider in deciding whether to use a FinTech service