Alternative Finances

Square’s Small Business Play

Square has evolved far past the the mobile POS systems that made it possible for small businesses to accept credit card payments with technology no more complicated than an iPad or iPhone.  Since the service that “launched 1,ooo mPos systems,” Square has launched P2P payments service Square Cash and has been pushing small business lending service Square Capital since last May.

Starting today (March 9)  the company is rolling out two new services for its small business base: instant deposits and protection for disputed purchases.

“We have a huge competitive advantage,” Roelof Botha, a Square board member and partner at Sequoia Capital, told The New York Times. “No one else has the kind of visibility we have into how these businesses that use Square are doing.”

This latest move further cements Square’s pivot away from consumer facing products – like the now defunct Square Wallet – toward a more solidified status as a SMB service provider that acts as a massive cache of data collected from the millions of credit card swipes it processes daily.

“What you see with Wallet is us acknowledging that people don’t really have a payments problem,” said Sarah Friar, Square’s chief financial officer.

Square has brought in over half a billion dollars in venture capital and claims “millions” of small and midsize business as clients. It also processed around $30 billion in payments in 2014, growing 50 percent from the previous year. The company takes 2.75 to 3 percent from each payment it processes but splits that with credit card companies and FI’s – leaving an approximately 34 percent gross margin after paying these institutions, according to a source, cited by The Times, who is reportedly familiar with Square’s business.

The company is valued at $6 billion in total –  despite frequent complaints from critics that the payments business runs on margins that are too thin, using customers that are too costly to acquire. Moreover, the mPos space is not as empty as it was when Square first came on the scene, and the company faces big competition from big players such as Amazon and PayPal who now offer similar card reading services.

Verifone’s CEO called the small-merchant payments business “fundamentally unprofitable” shortly before his company stopped offering a competing product.

This may explain Square’s data-driven merchant services like Square Capital, which essentially functions as a cash advance service for SMBs.

“These are the people who cannot get bank loans, and for whatever reason they’re not treated like a real business,” Friar said. “There’s an absolute market opportunity for us here.”

The new instant deposit product is an ancillary data-driven offering. When fully operational this spring, instant deposit will give businesses faster access to money they put into a debit account. The new charge-back protection service will cover some disputes between consumers and merchants.

“I would still define us as primarily a payments business,” said Botha. “I just think that the term ‘payments business’ has changed from what it meant in the past.”


New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.