INTERACTIVE SESSION: TECHNOLOGY Small Business Loans from a FinTech App Billy Joe Wilson, owner of Billy Joe's Craft House bank. Square outsources the more regulated parts in Port Aransas, Texas, was cooking up some of leading such as the ability to offer loans at uni- chicken-fried steak sandwiches in a food truck form rates and terms nationwide. That cables when an app on his tablet asked if he wanted to Square to operate as a niche financial institution borrow $5.000. The offer came from Square, Inc. that can offer banking services that regulated which makes devices that Wilson and other small banks can't offer without oversight from the businesses use to process customer credit card Federal Reserve payments. As Wilson was using Square to process Square evaluates whether a business can qualify payments, Square's algorithms had been working for a loan by analyzing its vast database of credit quictly behind the scenes to determine whether card transactions. It looks at data on whether a he was creditworthy. Square's system elt he was. business is attracting repeat customers, the num- With a few swipes, Wilson then accepted Square ber of chargebacks, business history, and process loan terms and received his loan within days. Since ing volume. The lending process is automated, and then Wilson has borrowed more than SI50,000 to makes it easy for customers to obtain and repay a open a nearby gastropub, loan. Most customers are not required to fill out a Tech firms such as Square are moving onto formal application. Application only takes a few the turf of traditional banks, not only with on chicks, with no long forms Upon approval. the line payment services but also in the banks' core business loan is deposited into the borrower's bank business of loans. The tech firms are able to take account as soon as the next business day. Square advantage of their vast troves of customer data takes a percentage of a company's daily credit card PayPal Holdings, for instance, has made more sales as loan repayments. Instead of charging inter- than $6 billion in small business loans since 2013, est, Square levels a flat for ranging from 10 to 16 using data it collected while processing payments percent of the loan amount. (A SI0.000 loan could for Internet retailers, Amazon has loaned more have fees ranging from $1,000 to 51.600.) The loan than $3 billion to independent merchants that sell is supposed to be repaid in full within 18 months goods on its site, using sellers' historical volumes Not all businesses are pleased with Square's as a basis for granting credit. In 2017 Intuit started machine-driven lending. Hardcore Sweets Bakery offering loans to businesses using its Quickbooks in Oakville, Connecticut, an alternative cupcake accounting software with data from their account shop, borrowed more than $130,000 from Square ing statements. Other nonbank online loan provid- between 2014 and 2018 to purchase more kitchen ers include Lending Club Corp., On Deck, CAN equipment and open a second location. According Capital, PayPal Working Capital, and Kabbage to co-owner Nicole Braddock. Square has stopped Square has extended more than $3.5 billion making loan offers to the bakery but wouldn't es in loans and cash advances to small businesses, plain why No one from Square's customer service and is now moving into consumer lending. It will team would return her phone calls, and she got loan up to $100,000 to businesses that use Square. only a generic response to her emails. Sometimes a Square is also exploring services for personal loans more personal touch is in order and lines of credit to the more than 7 million users There are other tradeoffs. The price for the of its Cash App digital money transfer service that speed and convenience of online lenders is inter- competes with Vermo est rates higher than those charged by banks. For In the 12 months ending on September 30, 3019, example, Getting Better Fitness in Chicago had to Square extended about 200,000 business loans, pay 25 percent interest on a short-term loan from more than three times the number of loans from Kabbage. The gym later switched to Il percent banks via the Small Business Administration financing from PayPal Working Capital Tea By But Square is still a small player in lending, with Two, a Bel Air Maryland tea room, recently paid its business loans averaging $6,500. This is much an 18 percent interest rate on a $20,000 loan from smaller than the typical bank loan On Deck. Online lenders, however, are more likely Square loans are funded by investors, so they to grant loans and to do so much more quickly charge higher interest rates or fees than loans from banks, which are funded by low-cost deposits. To than conventional banks, often without requiring avoid the regulations required for a conventional collateral. This is especially 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 $7.800 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 re- paid within 18 months. Instead of interest, Square charged a flat fee of $1,008. Brewery co-owner Raiye Rosado believed that while her experience of obtaining a loan from Square was largely posi- tive, she would probably use a traditional bank for larger loans. Sources: Becky Yeruk, "Some Small Businesses See Big Benefits in Online Financing." Wall Street Journal, May 12, 2019. Square Capital Review Merchant Cash Advances by Another Name, www.businow.orac cessed July 13, 2019, www.spareup.com, accessed July 15, 2019, and Peter Radegeair, "A $150,000 Small Business Loan-from an App. Wall Stre 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