Payments Platforms Expand Merchant Lending as Q2 Data Shows Growth

Payments platforms are using Q2 earnings to show they are moving deeper into merchant credit, turning transaction data into lending relationships.

Block, PayPal and Enova each reported growth in small-business loan books, driven by the same logic: a merchant that once generated only transaction fees can now produce interest income, loan-sale gains and a recurring credit relationship.

Block’s Square business processed $72.8 billion in gross payment volume during the quarter, up 13% from a year earlier. Fastest growth came from mid-market sellers with more than $500,000 in annualized GPV, Block said. Some of those sellers are also Square borrowers. Square Financial Services originates Square Loans to qualified sellers. Block sells most of the loans to third-party investors and keeps a portion. In Q2 it sold $1.2 billion of Square Loans, up from $1.1 billion in the same period last year. Gains on those sales rose to $69.1 million from $62.3 million, an 11% increase. Block attributed the growth in Square’s financial solutions monetization rate – which measures gross profit from Square Loans, Instant Deposit and Square Card against GPV – to Square Loans. The rate rose to 0.41% from 0.38%.

PayPal’s merchant loan book tells a similar story. Its merchant loans, advances, interest and fees receivable, net of participation interests sold, totaled $1.9 billion as of June 30, 14% above the $1.7 billion reported a year earlier, according to its latest quarterly filing. PayPal said the increase came principally from about $140 million of growth in its U.S. PayPal Business Loan portfolio and roughly $100 million of growth in PayPal Working Capital, primarily in Germany.

Pure-play digital lenders are also seeing demand. Enova reported $1.6 billion in small-business originations or acquisitions in Q2, up 29% from $1.24 billion a year earlier. Small-business interest and fee revenue reached $439.3 million during the quarter, up 34.6% from $326.3 million a year earlier. The quarterly small-business originations were more than double Enova’s $671.7 million of consumer originations, the company said.

The appeal of merchant lending for a payments company starts before a loan is made. Payments providers already have distribution. Their merchants have accounts, use their technology and generate a record of commercial activity. A credit offer can be placed inside an existing relationship rather than sold to an unfamiliar borrower.

A PYMNTS Intelligence report on middle-market businesses with $1 million to $50 million in annual revenue found that roughly 70% to 81% prefer faster, more flexible access to credit over a lower interest rate. For platforms already sitting between merchants and their daily sales, those preferences create an opening to compete on access and speed as well as the cost of capital.

The convergence is happening from both sides. Digital lenders are chasing more small-business volume while payments companies are adding credit to merchant relationships they already control. The Q2 results suggest merchants are providing enough demand to sustain those efforts.