Square Inc., a starry-eyed Silicon Valley tech company, is challenging brutally competitive Wall Street, where traditional banks and payment processors maintain their stranglehold.
Widely known for its app Cash, which allows users to send money, Square is building a more robust merchant network by reinvesting profits from the app into its business services to lure in merchants and become profitable.
“Profitability is ultimately going to be dependent on just running as much volume as you can… so moving upmarket is something of a necessity for Square because frankly, there’s only a limited volume within the micro-merchants space and probably not enough to fully push them to profitability,” says Brett Horn, senior analyst at Morningstar Research.
By enhancing business management and point-of-sale services, Square can attract more merchants increasing its transaction volume, the larger the merchant, the higher the payment processing volume, payroll list, marketing fees and so on.
“Our mission is economic empowerment… which means we build products, services and tools which help people participate in the economy,” says Square’s CFO Amrita Ahuja.
Square’s CEO Jack Dorsey says that FinTech’s potential to “democratize” financial services is crucial toward moving establishing decentralized cryptocurrencies, a goal of Dorsey’s that benefits from his cashless ecosystem.
“Square’s has been successfully attracting small and midsized merchants to its platform by providing a set of ancillary products and services that are necessary from daily operations,” says Moche Katri, managing director at Wedbush securities, “the Cash App is viewed as an accelerator for monetizing the company’s consumer base, triggering the purchase of other services within Square’s ecosystem.”
On the consumer side, users in the Cash ecosystem can invest in stocks and bitcoin, make purchases with the physical or virtual Cash card and transfer money via the app.
Square’s register. Courtesy of Square.
For business, Square offers point-of-sale services, which include customer check-out via its various terminals, processing refunds, tracking business performance and transferring funds to a bank. Merchants can even manage inventory, establish loyalty programs and send invoices.
Square’s ecommerce design platform. Courtesy of Square.
Beyond the brick and mortar stores, merchants can use Square’s eCommerce tools to create an online site to display and sell their products. There a variety of unique tools under the Square umbrella offering solutions for many business challenges from obtaining a business loan through Square Capital to payroll services.
“Square’s and PayPal’s 2-sided platforms servicing consumers and merchants have been gradually taking share from traditional banks by providing multiple financial services, including deposits, transfers, instant cash, and SMB lending,” says Katri.
Fintech is on the heels of big banks, offering financial services people have traditionally gone to their bankers for. FinTech is innately more tech-focused and competitive in the digital payment landscape. Also, Square is continually adding features to its ecosystem for those starting, running or growing their business. A person with a bracelet business may take payments through the Cash app or a Square card reader and a larger franchise like Joe & the Juice may use more services.
“Square was a bit more startup-like. It was easy to get started and not so heavily bound. The process was a lot easier,” writes Kasper Borst, U.S. director of Joe & the Juice in a shareholder letter, “Square has been nimble and easy to work with. Reader SDK has allowed us to transition our growing number of stores in the United States to elegant, affordable hardware, and take advantage of Square’s well-designed payments flow.”
This is where Square makes money. Sending money is free and nobody is likely to pay for that service, which is why Square is investing in and expanding its more popular services. While it can only squeeze so much from the average person there is potential for offering new services to growing companies.
“It’s just kind of become the established norm, you know, for Cash app, Venmo, Zelle is that the actual p2p payments on the platform are free,” says Horn the profit comes from the other features Square can offer “when those consumers use that card out in the world away from the p2p platform, then they’re getting fees off of the use of those cards.”
Dorsey not only aims to create a decentralized cryptocurrency but to democratize financial services. Many businesses using Square’s services may not have started without Square. It’s there from the business start-up to operation eliminating the need for a bank’s services.
“I have never been able to get funding through a traditional bank—despite having a strong credit score, a solid business plan, B.A. in economics, over ten years of restaurant experience,” writes Joanne Brown, owner of The Peach, a New Jersey bakery, in a blog.
However, she secured a loan through Square Capital, which she used to further the growth of her bakery.
Square’s third-quarter revenue climbed 44% year-over-year to $1.27 billion. Last earnings season revenue was $602.00 million during the quarter, compared to analysts’ expectations of $596.85 million.
Despite significant growth, Square has yet to have a profitable year.
Square’s 2020 guidance calls for the adjusted EBITDA margin to be around 18%, driven by a high 30% adjusted margin from seller tools.
Square’s business services earn a quick payback on investment of three to four quarters, as management discussed on the third-quarter conference call.
Amrita Ahuja, Square’s Chief Financial Officer, called that payback “too efficient.”
Square is also in a prime position to grow its stock, having completed the sale of its money-losing food delivery service Caviar to DoorDash. It can now focus on its buyers and sellers.
“What are the things that we can do uniquely at Square now that we see both sides of the counter the buyer and the seller – these are powerful and profound opportunities for us to explore in the coming years,” Ahuja said.
As Square builds out its business services and scale to larger merchants, it will take strides toward becoming profitable.
The current EPS Growth rate for the company during the year is 43%, and it’s predicted to reach 22.85% for 2021. The stock currently trades under $70. Many analysts predict it will rise into the mid $70 range by its next earnings season.
Horn says management would be better off expanding the legacy Square reader model into international markets because of its portability. Currently, Square is available in the USA, the UK, Canada, Australia and Japan and accepts each country’s currency.
While international growth is part of Square’s plan, it continues expanding its financial services with the submission of a bank charter application. Square will likely face increasing competition from Banks as they offer financial and business services on a much larger scale to compete with banks that have traditionally provided these for major companies and high net worth individuals.