Não é bom: When split-payment business loans fail

AWhile tech companies like Square and Shopify are capitalizing on their respective abilities to collect loan repayments from borrowers by withholding a percentage of their credit card sales, similar companies have replicated this model around the world. StoneCo, for example, which is listed on Nasdaq but operates in Brazil, last year had a market cap of more than $25 billion. More recently, however, it has dropped to nearly $3 billion.

In Brazil, StoneCo used its extensive payments business to begin offering loans to small businesses that were repaid through their customers’ credit card sales. This business seemed to hold up well at the start of the pandemic, but then got worse. Struggling companies have found ways to circumvent their payments, according to Bloomberg. “…[B]businesses started switching to other payment companies, which meant Stone no longer had access to their card purchases,” he said.

“The lockdowns have put pressure on businesses’ cash flow and many have looked for ways not to repay their loans,” StoneCo CEO Thiago Piau said.

Historically, diverting sales through another payment processor to avoid this type of obligation was known as “splitting”. This is an inherent risk for finance companies that make underwriting decisions based on the assumption that the customer is unable to end the relationship without seriously disrupting their business.

StoneCo was hit so hard that it stopped lending altogether and a significant percentage of its customers defaulted. During the company’s third-quarter 2021 earnings call, chief strategy officer Lia Matos said it intended to get back to lending, but with some tweaks.

“So those enhancements are, for example, the inclusion of personal guarantees from business owners and potentially other businesses they may have, improve the risk rating through additional data,” Matos said.

Covid may have been less damaging to similar businesses in the US like Square, for example, as Square was able to reorient itself to a PPP lender. The incentive to switch to another payment platform may have been diminished by the allure of leveraging a pre-existing relationship to obtain PPP funds.

StoneCo in Brazil is an example of what can happen to a fintech lender that depends on recovering credit card sales when that relationship breaks down.

To ensure that the team will do well in the future, StoneCo recently acquired Gyra+. Described as “a data-driven, SME lender that operates on a fee-based, asset-light approach,” the company plans to slowly return to credit.

“I don’t think we’re ready to provide specific guidance in terms of credit scaling,” CEO Thiago Piau said in November. “We’re really focused on the engineering and getting the customer feedback and all the customer experience that we’ve learned along the way.”

Brazil has 212 million inhabitants.

Last modification : February 20, 2022

James V. Hayes