Facebook, Square and Alt-Lending Look For Signs Of Spring

Spring has sprung, Q1 is done and, all around the payments and commerce ecosystem, there have at least been some signs that winter may be coming to a literal and metaphorical end.

The Dow and the Nasdaq have both recovered from their early-year faceplants, the labor force is expanding, the PYMNTS Investment Tracker shows VCs getting a bit more enthusiastic (after a mid-winter deep freeze) and the Store Front Business Index suggests that, despite uneven progress on a state-by-state basis, the small businesses that line America’s Main Streets and side streets are consistently outperforming GDP.

And there’s more good news!

Bigger retail players are pushing forward in an effort to stimulate consumer spending. Amazon doubled down on Dash Buttons last week, while Walmart bucked a series of long traditions all at once and jumped into card-based cash-back rewards that it’s leveraging to get its customers to shop online (and to enable Walmart.com accounts that can be used in store).

Everything, it seems, is suddenly going from a leisurely cruising pace to a faster jog. So, what to watch out for as the racers are getting into position?

Facebook Maybe Moves Toward Payments

For the last year and a half, Facebook has, more or less, persistently denied or downplayed its aspirations when it comes to payments.

Payments and commerce have ranked as an interest area but always in the context of being a secondary good to pursuing the platform’s primary goals. These comments have come while, in the background, Facebook (and its associated property, Messenger) has consistently and persistently dialed up its payments and commerce capabilities.

And, as the latest series of advances were announced this week, it seems Facebook is staking out its next interest area: in-app payments.

According to reports by AppleInsider last week, code has been discovered within the Messenger app that appears to hint at future interest in using the service to facilitate payment within an app. Reports also indicate that those purchases could be both online or to pick up in person and that FB has a sizable team working to making real-time credit card authorizations a reality within Messenger.

Details of how exactly that implementation will roll out remain foggy, though CEO Mark Zuckerberg did hint during his January earnings remarks that Facebook might consider partnerships as a method for offering payments in app.

“We’ll partner with everyone who does payments,” Zuckerberg said at the time. “We look at the stuff that Apple is doing with Apple Pay, for example, as a really neat innovation in the space that takes a lot of friction out of transactions as well.”

And while partnership is Facebook’s stated preference, some observers have noted that Facebook might also consider going it alone and taking Apple on as a direct competitor (or in partnership with a competitor like Android or Samsung).

Apple’s interest in playing with a partner like Facebook is also somewhat questionable. Apple has been making moves of late intended to expand into Safari-only Apple Pay mobile Web transactions that indicate a possibly increased desire to use Apple Pay as another tool to keep its users inside its walled garden.

With over a billion active users — who spend a surprising amount of their Web time on Facebook — a move into in-app payments seems like a no-brainer. Of course, that’s what everyone says about payments: It’s a no-brainer, until you get to the execution and user adoption part of it. Facebook is no stranger to commerce and payments attempts; it just has to be able to persuade consumers that buying inside its walled garden is something they want to do. Will they do so inside of Messenger? That jury’s still out, too.

Square Takes On Omnichannel (And Stripe)

Square closed out March with the release of “Build with Square” — a new set of developer tools that gives Square’s merchants access to the same sort of digital commerce capabilities already offered by competitor services Stripe, BlueSnap, PayPal and Braintree.

“Independent businesses have been poorly served by existing commerce solutions, which require them to laboriously piece together hardware, software and payments services from many different vendors,” explained the company in a blog post announcing Build with Square. “From payments to point of sale, financing to payroll, we believe all sellers — big or small, online or offline — should be able to start, run and grow their entire business with one cohesive system.”

Some parts of the new Square offering are familiar in terms of capability and processing costs.

Square is hoping to stand out by streamlining, particularly the data streams coming off of both online and offline transactions that the platform facilitates. Going forward, that data can be measured and viewed in a single platform.

The platform also contains a tool that allows merchants to customize any iOS point of sale in order to process payments through Square.

“We’ve found that, as merchants grow or you move more up market, there’s a need for customization. These companies will either work with existing developers to build apps or, if they’re larger merchants, will have their own IT shop,” Square General Manager Carl Perry noted in an interview.

The Build with Square toolset essentially does away with the need for merchants to turn to a third party, keeping in Square’s garden and able to easily expand their O2O reach.

“What we hear from customers is that more and more of them want to be able to sell both offline and online, and they’re looking for solutions that will enable them to seamlessly do both and have a consolidated view of their business,” noted Alyssa Henry, who runs Square’s seller division.

Square said it saw a gap in the market — no ability for merchants to enable omnichannel from one single platform. However, the integration of online and offline POS is a big hairball that even the biggest of merchants are struggling to solve. Like a lot of things in payments, easier said than done — except for the smallest of merchants whose needs are basic and whose volumes are small.

Prosper’s Portfolio Problems

While signs of spring are upon us, the chill of winter is holding on particularly well in some segments. Like alt-lending, for instance.

Last week saw online lender Prosper Marketplace catch a serious case of the chills from what The Wall Street Journal called “a cold reception … the latest sign of investor skittishness toward fast-growing online lenders.”

Investment was sluggish at the outset for a new bond offering tied to a cross-section of personal loans that had been advanced by the online lender. Those who did throw some funds at the bonds needed to be induced with yields that were five percentage points higher than a comparable offering a year ago, reported WSJ.

All in, Prosper floated a $278 million offering, and some segment of those loans coughed up at a 12.5 percent yield for buyers, up from a 7 percent yield demanded upon an offering last year by the firm. Those loans had been bought from Prosper and, in turn, sold by Citigroup.

Ratings on the newest deal are also forecasting a pickup in default rates. Previous offerings were seeing defaults estimated by the various agencies at around 8 percent. Those figures are now in the 11–12 percent range.

The gnawing doubt seems to have rested on Prosper’s (and, by extension, other online engine’s) business model that runs on a constant stream of new loans being underwritten and bought up.

Investors, facing risks (possibly increased risks), demand higher yield as a hedge, which pushes up rates. If rates go up too much, loan demand is choked off.

There’s also yet another issue, which has to do with the funding model itself.

Currently, as Financial Times reported, institutional money, via hedge funds and banks, has been a strong source of capital to these online upstarts. Those conduits can be fickle ones, demanding ever higher rates, as mentioned above and as was seen in the wake of the Fed’s latest rate increase.

Those increasing demands have led online lenders, such as Lending Club, to cap their reliance on Wall Street’s generosity. That transition may be necessary, but it won’t be easy given the pressures on the market and increasing investor wariness.

So, what did we learn this week? The time for the year’s second act is clearly getting warmed up. Facebook is moving more methodically — and apparently openly — into payments and commerce, Square is catching up (and hoping to pass) in the market it created and online lenders seem to be inching up toward their evolve-or-change moment.

It will be an educational spring.