Block’s Direct Lending Move Aims at Filling Consumer Credit Gaps

The platforms that have banks embedded in their operations are taking more of their lending activities into a direct model, giving momentum to income streams well beyond the confines of peer-to-peer transactions.

As had been reported last week, Block said that its Square Financial Services industrial bank has gotten the nod from the Federal Deposit Insurance Corp. to make consumers loans directly to borrowers, using Cash App Borrow. The announcement represents a shift, as the firm had previously made the loans through its external banking partner. By bringing the loan originating and servicing functions in house, Block retains the revenue streams associated with that lending.

“Cash App Borrow is designed to provide short-term cash flow in a simple and accessible way when alternatives are notoriously expensive and difficult for consumers to navigate,” the company said in a release, adding that under the external bank partnership model, the short term offering had seen $9 billion in originations last year. 

The announcement also represents a broadening of Square Financial Services’ reach, as the operation had been offering Square sellers business loans and savings accounts.  Savings balances tied to those activities had been $300 million at the end of last year.

Square noted that the same underwriting mechanisms that have been used for the business loans will now be used for the consumer-facing lending. The push into short-term lending comes as PYMNTS Intelligence has found that traditional avenues for credit access have been narrowing. By way of example, 29% of subprime consumers have applied for and been denied a credit card, compared to 12% of super-prime consumers.

In its 10-K filing, accessible here, the company details that its banking strategy seeks to “bank our base, move upmarket by serving families” and strives to “build the next generation social bank.” 

Cash App Card, the company has said, is the “entry point into a deeper banking relationship” with Block. Within the subscription and services based sales that that includes the Cash App offerings (and Cash App Borrow), Block’s $7.2 billion in revenues grew by 21% year over year, far outpacing the 5% seen with transaction-based revenues.

In other examples of the ways in which lending platforms are using the direct model to have some more skin in the game — as underwriting those loans with the advantage of the data flowing across those platforms — LendingClub disclosed in its latest annual filing that loans held by its LendingClub Bank totaled $5.1 billion at the end of last year, up 8% year over year. LendingClub Bank took shape upon LendingClub’s acquisition of Radius Bank, a pact struck in 2020.

SoFi Bank, which exists as a division of SoFi Technologies, said in its own 10-K that, in the wake of acquiring Golden Pacific,  and in addition to offering checking accounts, savings and credit cards through SoFi Bank, “we are originating all new loans within” that operation.

Holding more loans on its balance sheet allows the company to earn interest on those loans. The filings reveal that personal loans in the most recent quarter surged 26% year over year to $1.4 billion. 

And in a nod to the ecosystem effect, SoFi said the financial services revenue per product increased from $59 in the fourth quarter of 2023 to $81 in the fourth quarter of last year and its roster of 10 million individuals is up 34% year over year. 

Recent initiatives to expand the platform include the announcement last week that the company has finalized an agreement with Blue Owl Capital worth at least $5 billion. The deal with the asset manager will allow SoFi to expand its loan platform business, which refers prequalified borrowers to loan origination partners and originates loans on behalf of third parties. 

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