Square gets FDIC approval for in-house lending

Block secured FDIC approval to enhance its lending capabilities via its banking arm, Square Financial Services. This change shows a clear shift towards lending directly to consumers, tackling financial issues directly.

Approval Details

• Direct Lending Authority: The FDIC authorization allows Block to issue small-dollar consumer loans nationwide without relying on third-party banks. This move builds on Cash App Borrow, its existing short-term loan service, which typically offers loans under $100 with one-month repayment terms.

• Regulatory Context: The approval follows FDIC guidelines requiring banks to maintain prudent underwriting standards and loan administration procedures. Block asserts its underwriting model is robust, though small-dollar lending inherently carries higher default risks.

Strategic Drivers

• Financial Pressures: Block’s stock has declined over 30% in 2025, with its lending division reporting a 39% increase in transaction losses last quarter. Expanding in-house lending aims to stabilize revenue growth.

• Market Conditions: Economic uncertainty—driven by tariffs and government employment cuts—has heightened demand for short-term liquidity products like Cash App Borrow.

Critics warn that small-dollar loans risk trapping borrowers in debt cycles, echoing broader debates about FDIC oversight of high-cost lending. Advocacy groups urge the FDIC to enforce 36% APR caps on such products.

A pending Fifth Circuit case (Burgess v. FDIC) challenges the constitutionality of FDIC’s in-house enforcement proceedings, potentially reshaping how lending violations are adjudicated.

Block's shift to FDIC-backed lending aims to diversify revenue amid regulatory and economic challenges.

Block's expansion into FDIC-backed lending through Cash App Borrow involves intricate repayment structures, proactive default mitigation, and strategic user conversion tactics—though recent transaction loss increases (39% YoY in Q4 2024) reveal tensions between growth ambitions and risk management.

Repayment Terms & Enforcement

1. Cash App Borrow (Consumer Loans)

   • Fee structure: 5% one-time setup fee on average $100 loans (vs. 400% APR payday loans)

   • Auto-repayment: Integrated with Cash App balance/debit card usage, with manual payment options

   • Term flexibility: 1-month standard term, extendable through optional weekly payments

2. Square Loans (Business Loans)

   • Fixed-fee model: 10%-16% upfront fee instead of interest

   • Revenue-based repayment: 9%-13% of daily card sales + 1/18th minimum payment every 60 days

   • Acceleration clause: Repayment rate increases if minimums missed, with direct bank account debits authorized

^{Source: Square}

User Conversion Strategy

Block leverages three moats to qualify borrowers from its 57M Cash App users:

1. Behavioral underwriting

   • Minimum 3-month Cash App transaction history

   • Algorithmic scoring of P2P inflow/outflow patterns

2. Product integration

   • 73% of Borrow users first engage with Cash App Card

   • Afterpay BNPL adoption correlates with 13% higher Borrow eligibility

3. Gradual scaling

   • Initial cap: $200 loans to 5M pre-qualified users

   • Dynamic limits adjust with repayment performance

^{Source: DigitalTransactions.Net}

Risk Model Adjustments

Recent regulatory actions ($255M CFPB/state penalties) forced upgrades:

1. AI-enhanced fraud detection

   • Real-time transaction monitoring trained on 2024 fraud patterns14

   • 37% reduction in account takeovers since implementation

2. Geofenced lending

   • Auto-disable Borrow in states with >5% delinquency rates5

3. Loss absorption strategy

   • Maintain 2.5x loan loss reserves vs. industry 1.8x

   • Offset consumer defaults with 19% APR on late payments (vs. 36% cap advocacy)

While accepting higher near-term defaults (projected 4.2% 2025 loss rate vs. 2.9% 2024), Block bets on lifetime value: Borrow users generate 6% more transactions and 13% higher inflows than non-borrowers. Vertical integration through Square Financial Services eliminates 3rd-party partner fees, allowing 22% wider risk tolerance margins.

Underwriting Technology

1. Behavioral Data Engine

   • Analyzes 18+ months of Cash App transaction patterns (P2P flows, card usage, Afterpay adoption) to predict repayment capacity

   • AI components:

     • Fraud detection models trained on $9B historical originations8

     • Dynamic credit limits adjusting with real-time spending/revenue patterns

2. Open Banking Integration

   • Auto-imports 3 months of linked bank statements for SMBs

   • Cash flow analysis prioritizes:

     • 60-day minimum liquidity buffers for businesses

     • 50% repayment capacity via projected card sales10

3. Regulatory Safeguards

   • Military Lending Act compliance checks via DoD database cross-references

   • State-specific geofencing disables offers where delinquency exceeds 5%

SMB Ecosystem Synergies

Block's lending stack creates cross-platform value:

1. Underwriting Feedback Loop

   • 73% of Cash App Borrow users become Square sellers within 12 months

   • Seller card sales data informs consumer credit limits

2. Cash Flow Management

   • Integrated repayment via:

     • 9%-13% of daily card sales (businesses)

     • Automated Cash App balance sweeps (consumers)

3. Deposit Base Utilization

   • $300M Square Savings balances used to fund 18% of loan book

   • Instant loan disbursement to Square Checking accounts reduces capital drag

This vertically integrated model achieves 22% lower customer acquisition costs vs. fintech peers, while maintaining <3% consumer loan losses through machine learning-driven limit controls. Industry lenders should note Block's shift from APR-based to fixed-fee pricing - a model that aligns with CFPB's anti-predatory lending guidelines while preserving 64% gross margins on loans.

^{Sources: Square Underwriting FAQ, Businesswire, Jagdeep Singh Sahota, ETA-CPP, Paymnts.com}

Beyond Banks Podcast: 1West Real-Time & Automated Lending Market Place

Main Important Keypoints for Alternative Business Lenders

1. Self-Service Lending Marketplace: 1West has developed a comprehensive marketplace (ABLE - Automated Business Lending Engine) that enables 25% of customers to self-service through the entire loan process without human interaction, dramatically reducing operational costs.

2. Real-Time Data Integration: The platform integrates multiple data sources in real-time (credit reports, bank statements via OCR, Plaid connections, and Secretary of State data via Cobalt API) to create a holistic view of applicants.

3. Automated Compliance Verification: The system automatically verifies business information against Secretary of State records, reducing fraud risk and ensuring regulatory compliance without manual intervention.

4. Intelligent Matching Algorithm: Rather than simple rule-based matching, 1West uses "intelligent guidelines" to match applicants with appropriate lenders, optimizing for approval likelihood and competitive rates.

5. 24/7 Processing Capability: The platform enables round-the-clock processing of applications, which traditional banks and manual brokers cannot match, creating a significant competitive advantage.

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