Stripe agrees to buy Parafin, the embedded lender behind DoorDash's merchant credit

Stripe Capital, the company's existing lending product, has seen demand increase, Stripe says ^[9]. The Parafin purchase adds a specialist team to that business. "[The Parafin team] brings acute expertise and leadership in credit, risk and embedded financial products," Neetika Bansal, business lead at Stripe, said in the release ^[4].

When a processor lends, repayment comes out of the merchant's future payment volume ^[10]. "Whoever processes a merchant's payments can see its cash flow in real time and collect repayment directly from its sales, which is a better underwriting position than most banks have," Phil Philliou, managing partner at Philliou Partners, told American Banker ^[11]. He said embedded lending has become core to how payments companies make money and retain merchants ^[15].

The incumbents' loan books show what retention looks like. PayPal has originated more than $30 billion since 2013 across more than 1.4 million loans and 420,000 business accounts ^[19]. The average works out to roughly $21,000 a loan ^[24], and the average account has borrowed more than three times ^[25]. Square has lent more than $32 billion to small businesses since 2014 ^[16], about a sixth of the more than $200 billion Block has originated across Square, Cash App and Afterpay ^[17][26]. Parafin's borrower count is about a seventh of PayPal's business accounts ^[27].

For scale, Stripe was reportedly ready earlier this year to join Advent Capital in a $53 billion bid for PayPal, whose board balked at the price, according to American Banker ^[13]. That deal would have brought millions of consumers along with a merchant business that has offered credit for years ^[23]. Parafin gives Stripe a credit underwriting business with no consumer franchise attached. Stripe did not respond to American Banker's request for comment ^[3], and how Parafin's loans will be funded after closing is not on the record. Block, for comparison, lends through Square Financial Services, its own industrial bank with an FDIC-insured charter ^[18].

After closing, Parafin could stay a neutral engine that Stripe sells to platforms; Stripe could fold it into Stripe Capital and keep the spread; or Parafin's existing clients could treat a processor-owned lender as a competitor and move their programs. Aaron Press, research director at IDC Financial Insights, expects the second. "Parafin brings more of the lending business in-house, giving Stripe more control over risk, the opportunity to offer better rates, and the opportunity to take better margins," Press told American Banker ^[14]. Aaron McPherson, principal at AFM Consulting, said Stripe is diversifying into higher-margin businesses to supplement payments ^[21]. He said small businesses are hard to sell to, given how varied their needs are and how limited their scale ^[22]. "Building on top of an existing payments relationship solves this problem," McPherson said ^[22].

I think Press has the direction right: Stripe's own platform customers ^[5] become the main outlet for Parafin's credit. The case against is the third path. Parafin's business runs on other companies' platforms ^[1], and its founders built it on the premise that the software small businesses run on sees data banks don't ^[8]. A platform that processes payments with a Stripe rival would now be sending that data to a Stripe subsidiary. The view is wrong if, a year after closing, most of Parafin's lending still comes from its pre-deal clients and little comes from platforms already on Stripe.