Square Gives Loans to Restaurants Outside Network With Upserve

Square Inc.'s mobile-payment technology.

Square Inc.'s mobile-payment technology.

Photographer: Jin Lee/Bloomberg
  • Lending arm Square Capital is bright spot in earnings growth
  • Agreement gives Square access to 7,000 restaurants across U.S.

Square Inc. is joining with restaurant technology startup Upserve to offer loans to eating establishments, extending credit for the first time to businesses that operate outside of its own payments processing system.

Working with Upserve gives Square access to more than 7,000 restaurants across the country. The startup manages more than $8 billion annually in transaction volume and is adding 200 to 250 restaurants every month, according to the company. Upserve processes credit card payments and provides software tools that allow restaurants to see things like what percentage of sales come from repeat customers, analyze the performance of servers and monitor the restaurant’s online reputation.

Lending has increasingly become a growth driver at Square as Chief Executive Officer Jack Dorsey seeks to diversify beyond mobile credit-card payments processing. Before this deal, Square only extended loans to existing customers through its lending arm Square Capital, checking the credit risk of borrowers with machine learning and data gathered from servicing the companies through the payments platform. 

"We think that the application of what we do is broader than just within Square’s ecosystem," Jacqueline Reses, head of Square Capital, said in an interview. "So long as we believe that we have a data advantage in underwriting, and it’s relevant to our core business, you can see us extending beyond Square further."

The link with its customers helps Square make underwriting decisions, contributing to a low default rate of 4 percent, according to the company, and helping differentiate it from other alternative lenders like LendingClub Corp.

Square’s low-margin payments business, which started out with little white plug-ins that allowed small business to process credit card transactions via mobile phones, was seen as an entry point for customers who can be sold additional services, including loans and tools for managing inventory and analyzing sales. Those services are now the bright spot in earnings growth. In the second quarter, loan volume from Square Capital more than doubled from a year earlier to $189 million. The margins are also significantly higher than in the core payments processing business.

"Square Capital is making very nice money on the business," said Mark Palmer, an analyst at BTIG LLC. "As they continue to develop a track record for lending and you see default rates stay low and their access to small businesses increases, it stands to say that the number of investors attracted to the platform should increase as well."

Upserve, which was founded in 2009 as Swipely, uses artificial intelligence to predict how many customers a restaurant will have on any given day and generate sentiment scores of every menu item. The Providence, Rhode Island-based company will provide anonymous data to Square so that it can rely on the same models used to make underwriting decisions for existing customers and apply it to Upserve’s restaurants.

Square Capital can maintain low acquisition costs, since eligible Upserve customers would receive loan offers directly within the Upserve dashboard, according to Reses.

Upserve has raised more than $40 million with investors including First Round Capital, Index Ventures and Greylock Partners.

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