Stripe targets e-marketplaces to battle Square in merchant credit

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Stripe is joining the throng of providers offering merchant loans based on payment receivables with Stripe Capital, a service for e-commerce companies already using Stripe for payments processing.

Stripe's move, which it announced Thursday, is an all-digital version of the traditional merchant cash advance. Stripe is adding a twist in an attempt to create a network effect: B2B platforms and e-commerce marketplace operators already participating in the Stripe Connect program may in turn offer Stripe Capital to their own merchant customers. The loans will mostly be in the $5,000 to $25,000 range.

Merchant advances are a major play for other technology-driven merchant acquirers, which use the product as an additional enticement to lure small to mid-sized businesses away from traditional merchant acquirers and banks. These products are based on a steady flow of payments, which provide data to inform underwriting that traditional banks may not have at a granular level.
Stripe's rivals have been offering a version of merchant cash advance for years. Examples include Square’s 2014 rollout of Square Capital and similar services that use recent business data to automate the application process, eliminating the painstaking paperwork traditional loans often require. Square has since extended the product to consumers.

PayPal also offers merchant advances, and recently enhanced the product by offering immediate funding. Startups like Fundkite and established financial institutions such as Amex are also pursuing small merchants with advances to fund business expenses.

To access Stripe Capital, online merchants may borrow funds based on their transaction history with Stripe and if approved, funds arrive within one day, with repayment based on payment volume with a fixed percentage of daily sales.

To determine applicants’ eligibility, Stripe will weigh payment volume, percentage of repeat customers, payment frequency and changes in revenue growth, through its business network and advanced algorithms.

Stripe has been measuring demand for cash advances and loans. A year ago Stripe tested a merchant cash advance product called Advance, offering loans to small businesses with funds available within one or two days after applying.

Early this year San Francisco-based online lending platform Funding Circle announced a partnership with Stripe enabling small businesses already using Stripe to apply for loans up to $500,000 by directly transferring their Stripe transaction data to Funding Circle for quick approvals.

As Square moves closer to banking, Stripe has also added services as both companies move beyond payment acceptance as a core business.

Stripe has made several moves in the past year to add a broader range of services for small merchants. For example, Stripe acquired strong authentication technology by acquiring Touchtech, a firm that can offer PSD2 compliance for merchants in Europe and other markets that adopt open banking.

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