Company Overview
Square, Inc. is a financial services, merchant services, and mobile payment company that was founded in 2009 by Jack Dorsey and Jim McKelvey. Square is best known for their white mag-stripe reader that is compatible with smartphones or their terminal and registers that are found at your local mom and pop coffee shop etc. Square’s company mission is to ‘Help people never miss a sale and to empower merchants by making commerce accessible to anyone’.
Square’s Hardware Business Model
As mentioned earlier, Square’s mission is to never miss a sale and empowering its merchants. Square’s flagship products such as the reader and terminal are looked at as an execution machine where they make a profit of approximately ~3.5% per swipe on top of ~15 cents per transaction. At face value, the amount received seems pretty minuscule, but when looking at this from a macro business model and recurring revenue perspective, you can envision how effective this model really is. Breaking this down fundamentally, Square’s business model is a recurring revenue annuity business that grows while helping the businesses they serve grow with them. This is an extremely powerful model because their mission perfectly aligns with that of their merchants and customers where they simultaneously grow together.
Square Capital (Lending Disruption)
Square not only provides the execution machine in hardware and software, but they also provide huge competitive advantages to their customers with proprietary data and access to capital. Square has an offering called Square Capital that provides small business loans for their merchants ranging as low as $300 to as high as $100,000. Traditionally, small to medium-sized businesses would go to a bank to request a small business loan which for the most part is pretty difficult when it boils down to the approval process due to the high benchmark standards for small to medium-sized business (SMB) loans and their repayment credibility. Banks typically require 2–3 years’ worth of statements and nuanced items that make the approval process extremely mundane, tedious, and full of friction for both Banks and SMBs. This reaches a point where it is not worth the time for Banks to bank SMBs that have little revenue or deposits to offer.
Square Capital, on the other hand, eases the friction of the loan approval process which enables Square as a company to be disruptive in the small to medium sized business lending sector. So why does Square Capital make Square disruptive? Principally speaking, lending is a commoditized business that has been around for hundreds of years. Square Capital’s function is to help bridge the gap of financing the underserved in the SMB space, an act that traditional banks fail to do. The novelty of Square Capital is that it has the ability to pre-underwrite sellers because they have proprietary data and full visibility into how a business is doing and can appropriately size loans for them based on the data they see on their end. The evolution and use of data is Square Capital’s differentiator from other banks or lending institutions. Unlike a traditional bank that sees the end of the month, end of the quarter, and end of year statements, Square sees every transaction that the business or merchant has taken and can see the cadence of the business flow. Questions such as ‘When is the business doing well’ and ‘When is the business not doing so well’ can easily be tracked on a day to day or week to week occurrence on Square’s end.
In the case that a business isn’t doing so well, Square can offer them a working capital loan through Square Capital and allows the merchant to pay the loan off in whatever cadence works best for their business. Essentially, the better the business is doing, the faster they can pay off the loan. Conversely, in slower and tougher times, they can stretch out their loan repayment. Ultimately, the disruptiveness in Square Capital is that this is a frictionless, incredibly fluid, and easy process to receive and pay back a loan as Square has full visibility into revenues of businesses they serve and have the ability to flex as their merchants and businesses flex.
Cash App (Fintech Disruption)
At a high level, Fintech can be described as any business or service that uses technology to enhance or automate financial services. Essentially, companies or services that enable the scaling of financial processes. Square’s ‘Cash App’ is its app-based product that allows users to send and receive money similar to that of Venmo. Users can create an account for free and then instantly send or receive money from other users within their network. Cash App as well as Venmo have ushered in the era of Digital Wallets, a smartphone-enabled financial ecosystem that provides services such as wealth management, instant payments, and crypto assets at the ease and convenience of your smartphone device. With Cash App, Square is in a unique position because it manages two payment ecosystems with their Point-of-Sale (POS) hardware and software and their ~30 million users on Cash App. Currently, based on the data, Cash App’s geographic concentration is in the South and especially popular in low-income consumer cities like Atlanta where the unbanked rates are highest. CEO Dorsey explains that ‘People are using [the Cash App] as their primary banking account and in some cases, it’s their only bank account’.
Growth Trajectory since Inception (current as of 10/30/2020):
Conversely, the likes of Cash App and Venmo pay approximately ~$20 dollar for their customer acquisition cost (CAC). The quick and easy explanation for the Digital Wallet’s low CAC relative to incumbent financial institutions is that Cash App and Venmo have a viral nature and strong network effect where their platform invites other people into their world and space so both parties can mutually send and or receive units of account and transact on currencies. Based on this viral nature and strong network effects, we are starting to see twice the number of user adoption on these platforms.
Moreover, on network effects, it should be noted that these network effects have a nuanced difference to them compared to that of traditional social media networks. Conceptually, Cash App has this notion of never wanting to miss a transaction or form of peer to peer (P2P) payment. By enabling frictionless forms of sending and receiving payments, Cash App enables users to invite anyone into their network without revealing anything personal about the user. This can be illustrated by the example of Facebook or Instagram versus Cash App. Social media platforms such as Facebook or Instagram are quite revealing in the sense that they allow users to mutually follow one another and view each other’s personal profile which may be a little uncomfortable and revealing to some individuals especially if the end goal of the users is to simply share a P2P transaction or make a payment. This falls in line with the general every day saying that no one wants their mom or dad following them on Instagram and seeing their posts or that only adults vehemently use Facebook nowadays. However, in the case of Digital wallets and their network effects, users would love for their families and even strangers to adopt something such as Cash App because of the convenience that it enables for both mutual parties without sharing sensitive data.
What Jack and team at Square have built is truly special and will last as a cornerstone business in the financial services, mobile payment, and point of sale industry.
