What Role Does Alternative Data Play Here?

That’s all well and good for customers that actually have an outside bank account. But the whole payment setup causes a two or three day delay in getting the money from those credit card transactions, so we added instant transfer, where the customer can immediately and instantly get the money deposited in their outside bank account and then use their debit card instantly to shop with the next Square seller. The way the banks would do it is get like two years of audited financial statements, and two years of tax returns, right, so that to them, somebody else’s double check that they filed it with the government, there’s some validation there. And you can see at least a trend over a two year timeframe and maybe six months old, because they filed these things six months ago, but at least it is some snapshot of a validated trend in view.

Luke Voiles: The journey of the small business customers is the easiest way to describe all the pain points that we’ve been solving for our customers over time. So they’re rethinking about opportunity, how they grow and evolve their business. The banks just don’t serve these populations - they’re just too small and don’t have credit scores, so it’s just really tough for them to get access, and the process is very time consuming. Securing loans from traditional banks is very tough for SMBs - it’s a long and complicated process and it’s not that likely they’ll get the cash they need - only 15% of small business applications get approved at big banks, for example. It’s not just embedded lending - it’s embedded financial services for these small business customers. We want to launch these suite of financial services products to help customers in other countries and larger customers get access to these financial services in a way that it’s just easier for them to use and an automated like simple fashion, you don’t have to go into the banks anymore.

Bernardo Martinez: It’s a mindset and legacy issue in the sense that most of the banks’ data and infrastructure is not set for mining to take advantage of that data in a simplistic way. Luke Voiles: There’s some pretty great data from the Federal Reserve about what’s happened to small businesses through the cycle. What role does alternative data play here? I think the ultimate goal here is that as the economy continues to digitize, we are going to be able to use more information that was probably not scalable in a traditional underwriting process. Traditional banks typically have not invested in this process. The thought process of trying to put together the paper package of documents and get that loan, it’s just overwhelming for the small businesses that are just trying to kind of start and grow. Well, okay, we’ll give them a debit card, we’ll push the limit, like start working on KYC and KYB to open up to more and more of these businesses that may not have a FICO score or credit score or any credit profile at all. And you can pretty safely give them 10% or 15% of that amount. It’s just a prioritization of time and resources, and if they can get a loan quickly from a digital lender, then they’ll do it.

It’s almost like they can’t get out of their own way. With fintech lending, you have to have a cheap way to acquire customers, so embedded finance just makes it easier. What’s different about the customers that we serve is that they’re super small, they might even have an LLC, like they’re going to be a sole prop that just started their business. But now, business is back to normal. A lot of the stimulus has been driving excess demand - customers are back buying, which increases business confidence, so they think it’s time to grow. What are the main drivers that have been behind the recent post pandemic growth that we’ve seen in small business lending? As we’ve seen with Kabbage and Ondeck, for example. And now that we’re coming out the other side, this is where we’re seeing the market start to stabilize, which is great for the SMB customers that we serve.