Square expands its bank-like offerings, letting sellers charge customers in installments

Key Points
  • The move allows Square users to charge for big purchase by splitting them up into smaller, fixed monthly payments.
  • “It’s a seamless and transparent way to offer installment payments to customers who might otherwise walk away, or might not be able to buy something in that particular moment,” Square Capital's Jacqueline Reses says.
  • Square, run by Twitter CEO Jack Dorsey, has become increasingly focused on banking products like small loans.
Source: Square

Payments start-up Square is encroaching on even more of traditional banks' territory.

The San Francisco-based tech company announced Thursday it will let businesses using Square's payment network give customers the option to break big payments into smaller, fixed monthly ones.

"It's a seamless and transparent way to offer installment payments to customers who might otherwise walk away, or might not be able to buy something in that particular moment," Square Capital chief Jacqueline Reses told CNBC in a phone interview.

Payment installments, which Reses likened to a "super power" for small retailers, are otherwise offered through a larger bank or third party. This type of loan is typically reserved for retailers who bring in more than $1 million in revenue, and requires a lot of paperwork.

Square used proprietary data to see if there was demand. In an August survey, Square found that 84 percent of participants "appreciate the flexibility of being able to pay for large purchases over time" and 77 percent believe "financing options help them to effectively manage their budget." Square has had more than 36 million high-ticket transactions larger than $250 in the past year.

Employees also did field research by camping out in certain stores, asking customers about the process of filling out paperwork to pay in installments. They found the process to be if nothing else, embarrassing.

"It's not obvious when you're applying," Reses said, noting that people take their phone into the corner of a store instead of conspicuously filing paperwork, without fellow shoppers ever knowing that you weren't just scrolling through Instagram.

"We would rather the customer be able to have a private experience on their own device — they're not holding anyone up, it's not embarrassing, and there's no fear of giving information to someone they don't know" she said.

Square takes on the actual loan and risk, instead of the retailer. It pays the business the full amount up front, and the customer will pay Square back as a form of a loan. If approved, customers can decide to pay in three, six, or 12 month installments, ranging from zero interest to an about 24 percent APR. The application also does not hurt your credit score.

Banking the under-banked

Lohit Pattanaik, who runs a body parts shop for foreign car called Fly1 Motorsport, was among those who tested the program. He was using Square for invoices and said adding the installments option improved his sales by 20 percent to 30 percent over roughly nine months.

"I was seeking that kind of relationship through my bank, or third parties but we need to see $1 million of sales and didn't qualify," Pattanaik said, adding that most car enthusiasts used it for purchases around $4,000. "For the customer, it really became a better situation."

Square is increasingly focused on products that cater to small business owners like Pattanaik, who historically have more trouble getting access to financing. Since Square Capital launched in 2014, the company has quietly increased its presence in the banking world with offers like small loans and cash advances.

Source: Square

San Francisco-based Square, run by Twitter CEO Jack Dorsey, is otherwise well-known in the payments sector for its credit card processor, payment hardware and popular Cash app. CFO Sarah Friar recently hinted at more moves into banks' turf, and said that "anything you do today with a bank account, you should look to the Cash App to begin to emulate more and more of."

Square Capital partnered with eBay in July to expand small-business lending — an increasingly competitive area in fintech. Amazon also does this for sellers, and began extending credit to small business owners in 2011 while PayPal has a program called Working Capital to provide loans to merchants based on sales history.

Square, whose stock is up more than 200 percent year over year, originally provided loans to merchants already using its credit card processing services. Two years later, it expanded outside of Square through its partnerships program.

"We've always been focused on this mission — credit is one of the biggest pain points in starting, running and growing a business," Reses said.

WATCH: Here's why you should think twice before using your debit card

Here’s why you should think twice before using your debit card