The Journey from Payments to Lending

FX and Float: Operator Note

There is an often repeated pattern in fintech. A company starts as a payments company. It builds payment rails, acquires customers, and processes transactions. And then, somewhere around year three or four, the company starts offering loans.

Square did it. Stripe did it. PayPal did it. Razorpay did it. Adyen did it. And the growth rates for their capital product and the repeat borrowers for the capital product are clear signs that these are not experiments but full-fledged product lines.

Why is this happening?

A mature payments company has the customer fully onboarded, can see their cash flow data, controls the settlement pipe (which can also act as a collection pipe), and has the customer’s attention. A bank evaluating the same customer relies on months-old financial statements and a credit score that is far removed from the recent business health. So, the payments company can observe revenue in real time, verify it against actual transactions, and deduct repayment from the next payment.

Every major cost line in traditional lending is cheaper for a payments company lending to its own customers.

There is also a margin argument. As covered in Memo #3, payments margins face downward pressure. A company doing $10 billion in annual volume at 20 basis points makes $20 million. The same company lends only $500 million at a 4% net interest margin to make the same $20 million.

For any payments company watching its spreads narrow, this maths is difficult to ignore. This is a logical product to improve the margin. And there is a pressing customer demand for capital as well.

So the economics work, there is a real data advantage, and the customers need the product. It’s a great fit and easy to build.

This complacency leads most payments companies to underinvest. They assume that because they can underwrite better and distribute cheaper, the hard part is done. But lending requires credit risk management through the life of the loan, not just at origination. It requires sourcing funds beyond what’s on the balance sheet, whether through banking partners, credit facilities, or securitisation. It requires a real collections function for when the borrower’s business deteriorates. And it requires continuous investment in improving the underwriting model, because the first-generation model built on transaction data will not hold up through a credit cycle without iteration.

Most payments companies don’t treat these as core capabilities that require investment. They understaff the risk function, defer the fund sourcing to their payments treasury, don’t build the collections infrastructure, and move the engineering team back to payments features right after the lending product launch. The result: strong numbers in year one, rising delinquencies in year two, and a difficult conversation with the board in year three.

Square (now Block) is the best example of a company that succeeds by investing in these capabilities. It has underwritten more than $22 billion in loans, with aggregate loss rates below 3% - without conducting any traditional credit checks or asking for tax returns. To put this in context, the Equifax Small Business Default Index for traditional bank lending, in which borrowers undergo full credit checks, is around 3.2%. Square is matching the benchmark without any of these traditional checks, relying almost entirely on transaction data.

This loss rate is not a fluke. Square built repayment capabilities by wrapping it into its settlement flow, maintained origination discipline to onboard high-quality customers, and invested in the lending operation as a separate capability. The result: sellers who take a loan use an average of 3.7 Square products, versus 1.5 for those who do not, and retention improved by 15% for these sellers. The lending business, besides generating revenue, also deepened the payments relationship.

Every payments company faces this decision when they reach sufficient scale. The economics are too attractive, and the customer needs are too obvious to ignore. The real question is whether they are willing to invest in risk, collections, fund sourcing, and underwriting with the same seriousness as they do in payments.

The payments infrastructure gives you the distribution. It does not make you disciplined. And in lending, discipline decides whether you make revenue or incur losses.