Although Square Capital has been extending credit to Square (SQ) customers since 2014, some analysts think their newest loan product is might be moving the business in an overly risky direction.
BTIG, the privately-held investment banking firm, has published a report suggesting that Square is becoming too dependent on their loan revenue, and estimates that their stock is currently overpriced by about 75%. The report caused the stock price to dip by 8.5% at the close of markets today.
Also implicated in the report was Paypal (PYPL), which, like Square, began as a payment processor and has since ventured into the business of lending. The BTIG report cited past examples of online lenders who failed to properly gauge the risks of lending, and suggested that the current subjects of inquiry are making similar mistakes.
Square’s new loan product, called Square Installments, is offering lower-than-average interest rates for business clients making significant purchases, which can be repaid over three, six, or twelve month installment periods. BTIG analyst Mark Palmer does not believe Square has built in sufficient compensation for themselves considering the risk they are taking, and he suggests that even attempting to pass the risk on in the credit markets will not adequately mitigate the risk, especially given the smaller margin they have available to split with potential credit investors.
More companies, like Intuit (INTU), Payanywhere, Clover, and Sumup have entered the small business payment processing space since Square got started, and the increasing popularity of micro-loans, as well as mobile banking, non-traditional investing, and other new financial applications, present companies like Square with many tantalizing opportunities for diversification. The question is, will they get it right?