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The week in fintech: Square pushes new point-of-sale lending for big purchases

This recap features updates on bank technology, payments, online lending and other news in the U.S. financial technology space. Send tips, ideas and chatter to For other recent fintech news, click here.

One of the U.S.'s best-known fintech companies has enabled a new payment method at the point of sale — an alternative to making large purchases on a credit card.

Targeting both consumers and small businesses, Square Inc. unit Square Capital LLC launched a payment method that lets both businesses and individuals pay for large purchases in fixed monthly installments. Square Installments, which has been in pilot since June 2017, is now offered anywhere sellers take payments with Square in 22 states. The interest rate charged will range from zero percent to 24% per year.

"There is this enormous need and market demand for creating better liquidity for small businesses," MoffettNathanson analyst Lisa Ellis said in an interview.

Small businesses have typically not had access to this kind of installment financing program, which is usually reserved for larger companies. But companies like Square and PayPal Holdings Inc. have been ramping up their loan businesses, with PayPal aiming more for e-commerce purchases through its financing arm PayPal Credit.

The two fintech payments startups are "in a race" to roll out new products and services, Ellis said. The analyst believes each company is ahead in a different way.

"PayPal is definitely more developed in what they're doing. They've been extending various forms of merchant credit for 10 years," Ellis said. "But Square has ... a more scalable model because they've got these partnerships in place that allow them to immediately shift the loans off their balance sheet."

For its business lending offerings, Square partners with Celtic Bank. The Square Installments consumer loans, however, will be originated through Square Capital and kept on the balance sheet, a company spokesperson said.

The move is a "natural extension" to Square's expansion in financial services, Compass Point analyst Michael Tarkan said in an interview. But Square is just the latest of a number of point-of-sale lenders. The other primary public digital lender that targets consumers at the register is GreenSky Inc., which focuses on the home improvement and healthcare markets. A Square spokesperson named the retail, home and repair and professional services industries as targets for the installments loan product.

If this alternative financing model becomes more popular, then these lenders could take market share away from credit card companies and banks.

"A big question is whether or how meaningful it becomes," Tarkan said.

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Elsewhere in fintech, Goldman Sachs Group Inc. is reportedly looking to slow the rapid expansion of Marcus, its online lending platform. The firm cut Marcus' loan originations target for next year, people with knowledge of the plans told Bloomberg, citing concern about the stage of the credit cycle and changes in market data.

LendingClub Corp. settled with the Department of Justice to end an investigation that began in 2016 when the company announced an internal board review that led to then-Chairman and CEO Renaud Laplanche's resignation. The $2 million penalty is not expected to have a material impact on the company's operations.

Separately, the SEC brought charges against Laplanche and LendingClub Asset Management LLC for using fund money to benefit LendingClub rather than the company's clients. The SEC said Laplanche and former LendingClub Asset Management CFO Carrie Dolan misled investors and breached their fiduciary duty.

In addition to a $200,000 penalty, Laplanche — now co-founder and CEO of digital lending startup Upgrade Inc. — was barred from the securities industry, which he can apply to re-enter after three years. LendingClub Asset Management paid a $4 million penalty and reimbursed about $1 million to investors. Dolan agreed to pay a $65,000 penalty.

On the payments front, Credit Suisse analyst Paul Condra released a report on PayPal this week, writing that the end of its eBay Inc. agreement is good for the payments company. The eBay contract includes a non-compete provision, so its expiration in 2020 might allow PayPal to expand its strategic options, Condra wrote in an Oct. 4 note. The analyst also called for a "focused app-based offers-and-rewards campaign," writing that it could increase PayPal's consumer engagement.

In the Philippines, banks have been slow to introduce digital services because of what industry experts said is poor infrastructure and consumers' lack of trust. The country, which has the slowest average internet connection speed in the Asia-Pacific region, has not seen the same flurry of digital bank offerings as the rest of the region.

From Sept. 28 to Oct. 5, the SNL U.S. Financial Technology Index fell 2.94%.

A recent report from S&P Global Market Intelligence explores how banks and insurers are embracing fintech innovation. The report looks at recent trends and provides outlooks for the insurtech, digital lending, digital investment management, digital banking, payments and distributed ledger technology sectors. Click here to read the report.