Big ideas often start by solving a seemingly small problem.
In the case of Square — the payments innovator that launched hundreds of mPOS imitators — the small problem was $2,000 worth of handblown glass that artisan Jim McKelvey couldn’t close the deal and sell.
Not because he didn’t have a buyer, but because his buyer didn’t have that much cash— and McKelvey didn’t take credit cards.
So, while McKelvey lost out on that $2,000 sale — he and his (friend) and Co-Founder Jack Dorsey — the founder of Twitter — did end up with a $17 billion idea (Square’s market cap at the time this piece went to press). Making it the most valuable set of glassware never sold.
A worthy consolation prize by anyone’s measure.
Square, of course, moved from a small idea to a big idea fast, loaded to the gills with big plans and ambitions for the world of payments.
In a conversation with economist and author of “Matchmakers: The Economics of Multi-Sided Platforms,” David Evans, in 2009, Co-Founder and CEO Jack Dorsey initially hinted at ambitions of controlling both ends of the payments ecosystem with what he called a “more elegant” payments experience.
And industry pundits fell in love.
“Dorsey is the only guy in the industry who’s thinking about payments in a deep way, and Square is the only payments company that’s innovating on hardware, software and price. Now, as we approach the launch of the Starbucks collaboration, I think we’ll see this approach pay off. This will be Square’s moment: Millions of people will see its magical payment system in action for the first time. Once they get hooked on it, they won’t want to stop.”
Such was the opinion of Slate in September of 2012 — and while today it may seem a bit overzealous, as Karen Webster pointed out at the time, it was clear that Square’s ambition was to move well beyond dongle and card acceptance for teeny tiny merchants.
So, how has Square shaped payments and what’s next?
The Bumpy Road
It’s been an interesting and eventful eight-year journey.
As we all know, the Square Starbucks deal did not cause acquirers to disappear or PayPal to rapidly fold up its tent. In 2014, Starbucks stopped accepting Square’s mobile wallet, and shortly thereafter, Square pulled the plug entirely on that mobile wallet experiment. The payments processing deal between the two firms collapsed about a year later — a reality that Square’s IPO filings made clear was a major money-saver for Square, since the deal was such a money-loser.
That IPO also tended toward the dramatic.
Square’s enthusiasm for the “get big fast” mentality, without much regard for making money, found more investor interest in the early 2010s than it did later, when investors suddenly realized how companies might eventually make money. Questions arose over Square’s business model — serving micro merchants who were risky and making money from processing fees, which were lumpy and low. That churn, and low volume, which also came with a big dose of chargebacks, raised red flags for many.
After many fits and starts, Square pushed into an IPO in late 2015. It was one that was widely thought was headed for a fizzle.
But that fizzle didn’t happen. Instead of pricing within the $11 to $13 range, Square lowballed its IPO price at $9 share price in the hopes of a pop. Which it got. Shares ended day one trading at $13.07 — up 45 percent on the day. The IPO drove $243 million, most of which was spent cleaning up red ink on its beaten-up bottom line.
But profitability has remained elusive.
During its last earnings report, despite showing gains in every metric (revenue, earnings, transaction volume), Square’s bottom line was still quite red: showing a loss of $0.04 this past quarter, or about $80.5 million.
But less red than analysts were expecting — and much less red than $0.34 loss last year.
Their performance last quarter was eye-catching for what it says about Square’s pivot over the last several years toward becoming a technology-driven merchant services firm. It did that by adding additional capabilities and services — the additional sources of revenue beyond payments processing.
Solutions such as Square Capital, Caviar (the food ordering and delivery service it acquired) and Instant Deposit (which puts money into merchant accounts immediately) not only helps its existing SMB customers navigate the changing retail world in which they were operating but also recruits larger merchants to the portfolio.
And puts strong numbers to the bottom line.
The Square Evolution
Square has come a long way from being an mPOS solution for cash-based glass blowers and farmers market purveyors.
In 2013, Square Market offered its physical sellers — including those farmers market jam and jelly makers — the chance to go “omni” and expand their reach beyond their own local communities. Square Market made it possible for any of those sellers to create a store on its platform for free, provided they run their transactions thru Square, of course. For larger merchants, Square Market syncs up items sold in their physical stores via Square Register so that inventory counts and product availability remain accurate across all channels.
Launched in 2014 as the firm’s lending arm, Square Capital has extended over $1 billion in working capital to over 100,000 small merchants. Square reports that 92 percent of Square Capital loans are for amounts under $50,000, with the average loan size at roughly $6,000. Last quarter, Square reported that it facilitated more than 40,000 business loans at $248 million in the quarter, up 68 percent from a year ago.
Square also cites evidence that those loans are extending opportunities to those who might not otherwise get financing. Among sellers who have accepted a loan from Square Capital, 54 percent are women and 46 percent are men; among millennial business owners, 60 percent are women and 40 percent are men.
Square also reports that access to all of the services in their portfolio are helping tiny businesses get bigger, in addition to attracting larger small businesses. Last quarter, Square reported that sellers with more than $500,000 in annualized volume were 14 percent of Square’s users — up from 9 percent two years ago.
That means, of course, that the bulk of sellers continue to be smaller firms with less than $125,000 GPV annually [KW2] — something that CFO Sarah Friar told analysts the firm sees more as an opportunity than a limiting factor, given the opportunity for cross-selling and upselling its products and services to existing customers.
“We’re clearly still in growth-land,” Friar said.
In 2013, Square launched Square Cash, the firm’s P2P payments platform. Anyone with a debit card can send up to $2,500 a week for free to anyone else with a debit account and, more recently, a bank account for a 1 percent fee. In the U.S., this is an advantage over Visa, given its large debit footprint. Cash Pro is the SMB version of Square Cash and does enable bank-to-bank transfers (in addition to debit card transactions) for a 1.5 percent fee.
In the fall of 2016, Square Cash added a virtual debit account to the mix, meaning that a recipient can opt to create a virtual Visa debit card on which to apply those funds — and then spend it anywhere online that Visa is accepted. Users can only spend what’s on the card.
On the hardware side, in late 2015, Square rolled out its latest generation of card readers that were both chip- and Apple Pay-compliant. It also invested in accelerating the speed of its EMV card readers. A firmware update reported earlier this year that the typical time a person has to wait for their EMV card to be read was reduced from an already fast 4.2 to 3.6 seconds.
Square also cozied up to Apple Pay and helped promote its use in the SMBs, in which its register terminals are being used. In January of 2017, Square announced that SMBs in the U.S. can process more than $12,000 worth of Apple Pay payments without having to pay a fee (it amounts to about $350 in fees saved a year). As we suggested, that’s not much of a game changer for Square or Apple Pay — but free processing is always a good hook for getting merchant interest (which Square wants). And more so for Apple Pay, who gets more attention from the consumers who visit the local coffee shops and see that they can use Apple Pay to transact.
Square also announced last week that it planted its flag in the U.K. and would be using it as a lynchpin for its European expansion. The company is currently in Canada, Japan and Australia.
“The U.K. is really interesting in that we see a lot of card usage through tap … which is perfect for our new card reader,” Jack Dorsey said in a prerecorded CNBC TV interview. “There are over five million small businesses in the U.K., and we think less than half accept credit cards, so we think the market opportunity is huge.”
Dorsey declined to say how many merchants are coming on board in the U.K. for the test but said it’s “enough” and covers different industries and businesses, from merchants that sell flowers to restaurant operators.
Dorsey said in the interview that the U.K. rollout of Square should have a “fairly meaningful” impact on revenue in a positive way this year but disclosed to provide forecasts or figures. He said launching in the U.K. will not increase its capital expenditures or impact its march forward to profitability.
If past is prologue, what’s next will likely be a bit like what came before: expanding the utility of its payments and commerce platform in a space that has become the hot space to be in payments — the SMB market — with larger competitors who, too, are competing on the basis of everything else that SMBs need to run their businesses: access to working capital, omnichannel capabilities, acceptance of all payments methods (including cash), order ahead and delivery.
And while Square never made much of a go of its mobile wallet, it has acquired a ton of registered users over eight years, with accounts on file that could become a competitive advantage for them — or other interested parties. Is the SMB network that Dorsey spoke of in 2009 now coming full circle?
Only time will tell.