Kabbage gets into payments — and in Square and PayPal's face

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The online platform lender Kabbage is making the move beyond just providing working capital loans to small businesses, putting it in direct competition with alternative acquirers and payment companies.

It's a reversal of the approach Square and PayPal took — offering payments first and then using that transaction history to make lending decisions — and signals a path for more competition to come to the B2B payments market.

The lender has had meteoric growth in recent years, in part on the strength of the way it evaluates its customers for loans. Prospective customers provide Kabbage with read-only access to their bank statements, accounting systems, inventory levels and even social media accounts. Kabbage then uses a fully automated underwriting solution to provide customized working capital loans to best fit its customers’ needs.

“One of the things most small-business owners do is figure out their cash flow" to determine capital needs, said Rob Frohwein, a Kabbage co-founder and its CEO. "Our advantage is that we do the math for business owners. Its saves them time and helps them run a more efficient business.”

The vendor's Kabbage Payments service builds on this model by offering the ability to create, send and manage invoices through an online portal, see all payment activity through a single dashboard and access money earned within a 24-hour window (time and business day restrictions apply). The service has recently completed a successful beta pilot with a set of existing customers and is being rolled to its entire customer loan portfolio.

The payments service puts Kabbage in more direct competition with alternative acquirers and digital payment companies.

“Square Capital and PayPal Capital process every [POS] transaction of their respective customers, calculating cash flows and using AI it allows them to provide instantaneous customized credit," said Richard Crone, principal of Crone Consulting LLC. "It’s this instant issuance of the loan that differentiates them. Kabbage is coming from the lending side hoping to improve their decisioning through payments processing."

Kabbage, which is based in Atlanta, reports that two-thirds of its more than 200,000 customers rely on invoicing to receive payments for goods and services delivered, and many will wait as long as 90 days to be paid. It views this payments processing service as a tool for them to speed up receipt of payments.

“We tested this with a measurable set of customers and there was a high take rate of this product,” Frohwein said. “This product stands on its own two feet. We will make this available to non-Kabbage customers in the reasonable future.”

Frohwein suggested that the payments service is more than a cross-sell opportunity, and can help the company expand beyond its traditional customer base.

“They are competing with a number of established players with significant experience such as Intuit’s QuickBooks," Crone said. "Their overall success and the economics of this service depends on their ability to generate rapid and widespread adoption among both buyers and sellers who are sending and receiving payments.”

Business owners can use Kabbage's new custom payments link to create a unique URL for their business and send payment requests through texts, emails or the web to collect card payments securely and rapidly.

Businesses can send an unlimited number of invoices and estimates for free with no monthly fees. Cash and check payments received are always free, and the fee to process credit cards is 2.9% plus 25 cents per card transaction.

According to Crunchbase, a website that tracks investments in private startups, Kabbage has raised over $2.5 billion in debt and equity financing over 16 funding rounds with investors including SoftBank, Credit Suisse, Santander Bank, Thomvest Ventures and ING Ventures.

In addition to raised capital and venture funding, all Kabbage U.S.-based loans are issued by Celtic Bank, a Utah-chartered industrial bank. Kabbage Payments, a registered payments service provider and payments facilitator, is sponsored by Fifth Third Bank.

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B-to-B payments Alternative acquirers Alternative lending Kabbage