Square Installments Has Been a Long Time Coming

I see there’s been a lot of discussion around Square’s rollout of Square Installments and thought I would weigh in real quick. First, let me just say, that I have no idea if Square has been down the last week due to last week’s downgrade, Dorsey’s inside selling, the Square Installments launch, or just a broader market rotation where high-flyers such as Square are going to get hit first. But since Square Installments might be related and that seems to be the hot topic, I thought I could shed a little light on it.

First and foremost, to learn about the new service, check out this video: https://www.youtube.com/watch?v=HhCviU7_UCc

This isn’t about growing its business by capturing lucrative consumer loans, this is about offering a feature to capture more merchants in its ecosystem. For some merchants, this will be a very attractive service. Think of those that sell big-ticket items (art or custom carpentry) or offer big services (general contractors maybe). They now might use Square as their payments provider just because of this feature which allows the merchants to approach customers with additional payment options.

Second, I don’t think the proprietary data Square has and uses so effectively for Square Capital, will be available for these loans. I do not know if Square will have an inside advantage then over other lenders when it comes to better default rates. That’s okay. For the most part, third-party lenders will hold the loans and the risk. That SQ passes these off and miss out on returns from the loans is okay because, again, it’s all about capturing these businesses in their ecosystem. Not about juicing their profits from these loans.

Finally, this new product shouldn’t be a surprise to shareholders or analysts. Management has been talking about such a product since at least 2017’s Q3 conference call. In that call, CFO Sarah Friar said:

The secondary is consumer installment. So, recall we want to bring that superpower to small businesses that often big businesses have, which is the ability for them to finance a purchase for their customer, so it makes the customer’s purchase a little easier to decide upon. We think that ultimately grows their business. The net of it though is we see our broader ecosystem-so subscription services where Capital fits, still growing 84% year over year. In my mind, that speaks to just the broad ecosystem of many products. It’s not just Capital. Capital is very important. We’re going to keep growing it. But there are many more pieces that we’re now adding into that portfolio. All of which is helping our sellers do what they do best, which is getting out there and selling their products.

From https://www.fool.com/earnings/call-transcripts/2017/11/09/sq…

It’s not like Friar just dropped that comment and never brought the subject up again either. In the company’s most recent conference call, 2018 Q2, she again discussed it:

The secondary on Capital that we continue to iterate on is installments. Recall that is effectively where we place ourselves at that really interesting nexus between the buyer and the seller. We have oriented to be a seller product, so we know that small businesses traditionally don’t have access to installment programs. So, it’s a tool that larger businesses use to help them grow and we want to make sure it’s on offer to smaller businesses.

What we’re able to use there is the knowledge of both the business itself but also the consumer. So, we’re starting to learn about consumer information that we might see more broadly on Square’s network and from that, just continue to test and iterate. I think what we see so far gets us excited because the sellers who are utilizing Square installments are absolutely seeing their business grow. So most important thing, when they grow, because then we’ll grow.

From https://www.fool.com/earnings/call-transcripts/2018/08/01/sq…

What do these comments make clear? It’s all about the sellers growing their business! The consumer loan is just a means to do so.

I love the move and think the market is fundamentally misunderstanding the risk involved and why Square is doing it. That being said, while SQ is an awesome company, it is also highly-valued – as in nosebleed. When a company is valued like that, these types of things will knock it down. That’s okay. Hold for the long-term.


Long SQ
Intuit (INTU), MasterCard (MA), PayPal (PYPL), and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx


Matt, I would be interested to know what your views are (completely divorcing your views from TMF recommendations if possible) about the older players in the general payments area, MA and V.

I wonder to what extent, if any, you think they are at risk from all the vigorous younger entrants, eager to be disruptive, of traditional ways of paying.

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Thanks for digging up the information. However, does it really make a difference? At the end of the day they are providing credit to consumers and are taking on the risk of defaults. Of course it does increase the seller’s business but at the expense of eating the risks. If I take an extreme example - the “no income no assets” loans also increased the home seller’s business but it still ruined anyone who end up holding the debt obligation.

I wonder how SQ is going to decide on who to provide credit to. They know the financial ins and outs of the seller, but they are providing the loan to the buyer who they have no info about… Are they just going to base it on their credit score?


I wonder to what extent, if any, you think they are at risk from all the vigorous younger entrants, eager to be disruptive, of traditional ways of paying.

I would too! I’m long VISA. I’ve been a card holder for decades. Not only is it a very convenient way to pay, I have a huge credit limit including a substantial cash withdrawal limit. I hardly ever use these facilities but it gives me great comfort that they are there for emergencies. Between that and the margin account at my stock broker, which again I hardly ever use, my money management requirements are amply covered, supporting the cash I have in a savings account.

A good credit card is not something I would easily give up. There are some crappy cards like the ones issued by Japanese owned banks and those issued by telcos with which I have had very poor experiences. CitiBank has been terrific over the years. My Mom opened a savings account for me when I as a teenager at the First National City Bank of New York, now CitiBank. Granted, the customer services is provided by the bank but the medium is the credit card.

Additionally, it’s not as if VISA and MC are standing still.

Visa signs on Postmates as it grows real-time disbursement service
By Emily Bary
Published: Oct 3, 2018 10:26 a.m. ET

Visa said on its latest earnings call that volume for Visa Direct, a real-time disbursements service, has doubled in the past year.

Courier network Postmates is the latest gig-economy company to sign on with Visa Direct, Visa Inc.’s real-time deposit service.


V is a growth stock! According to my calculation it has a CAGR of 30.0% over 10 years and 23.8% over 5 years. My current position has a CAGR of 25.2%. One great attraction is that V and MA don’t have credit risk, the issuing banks do.

Denny Schlesinger


V and MA have billions behind them. It’s very easy to accuse them of being idiots by letting the fintech companies eat their lunch. They’re now playing catch-up. But hindsight is wonderful. Maybe they were just letting watching the upstarts to see if it worked, as proof of concept. Now that it has shown to work, they’ll be moving into that space. Catch-up they will. Not a holder of either but Denny’s championing of them is hitting a cord as long-term holdings.

I love SQ because Friar always makes their mission so clear. Everything they do, it’s all about giving power and benefiting the SMB. The loans, financing, installments. It’s the ecosystem that is so attractive. Giving the advantages of big businesses to the small business. Yes they make money from it, but fundamentally it’s about reducing barriers for business management and growth. It’s easy for them to give credit, easy to take on credit when required, easy to pay and manage their employees, easy to take payment from customers, easy to manage their books. Big businesses can afford large departments to look after some of these issues, small businesses can’t afford to. Square makes it easy. Friar is also very quick, without prompting, to point out that they reduce liabilities on their balance sheet by reselling the loans. So of course they want low default risk so they can more easily resell the loans.

Will V and MA steal share from this sector? I actually don’t think so. I think they’ll start to affect the growth of the likes of Venmo and Square Cash by making peer-to-peer easy and instant, no matter what your bank is. But to disrupt the SQ ecosystem, I’m not so sure.


My wife and I have a business where we sell things online, going on 10 years now. As we continue to grow the business, we took a loan out with Paypal a couple years back to buy inventory before Christmas,because the terms were really good. The experience was great, really easy to sign up,paid a small fee up front with no interest on the balance, and as we sold the inventory a chunk of the proceeds went to payback the loan over about 6 months.
The last couple of years we haven’t taken a loan, the terms aren’t near as good, and we don’t have a need.

Paypal offers consumer loans also, and have been doing it for a while. I can see how much of the items my customers buy are paid with Paypal consumer loans. Right now around 15%. So I would think it would be higher for business’s that sell large dollar items. This will be a big benefit to businesses that use SQ.

My point is SQ is doing something Paypal has been doing for a while. The companies know there customers very well, both the businesses and the consumers, and will have a much lower loan default rate than banks. They just have more information than a bank would have and can make better loans.

There is a large, and growing, group of people that use the Cash app as their bank, they don’t have a bank account. SQ is trying to serve this group of people. They have all the data on how much they deposit each week from their pay check, etc.

More services to help their customers, making their product more sticky and valuable.

Jim (long SQ and PYPL)


But are’nt V and MA already in this space to some extent? When we bought our new home from the local furniture store (not a big company by any means) they gave me 1 year zero payment 0% financing through MA card from a bank. This is what SQ is also doing albeit with smaller mom and pops. But instead of using a bank they are bundling a selling the loan which does have slightly more risk than V and MA. Correct me if I am wrong.

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We use square in a couple of our businesses, and we actually looked at joining square installment, but unfortunately, it’s not available generally, and you have to be selected (as a merchant) to be part of the program.

From the description of the program I have read from the square merchant page, this shows up as ANOTHER payment method when the customer checks out (or pays an invoice online).

  • Customer Must Apply and provide information (I assume SSN and allow a credit pull)
  • Customer might be declined for the program.
  • This is an installment plan of 3, 6 or 12 months with equal payments, including interest.
  • I would assume those payments are taken monthly on a credit card (and not by sending a check…)

Note that Amex actually has something very similar on some of their card, where big purchases can be spread over 3 to 9 months with pre-calculated upfront interest charges that don’t count against your carried balance.

In that regards, I don’t think it is quite as free flowing… as some fear.