How Square’s Results Spotlight Main Street SMBs’ Resilience — And (Cash) Challenges

Earnings season provides a wealth of data — of numbers and acronyms, a snapshot of balance sheet strengths or weaknesses.

And often, drilling down into business segments and management commentary provides insight into just how we as a nation are faring, depending on where you look. All eyes may be trained on Wall Street now, and Main Street too as the latest tranche of business lending gets underway.

Square’s latest earnings results, delivered Wednesday (May 6), underscore the resiliency of small- to medium-sized businesses (SMBs) as they grapple with the lingering impacts of the pandemic as well as a need to tap into additional funding sources as they try to pivot toward a new age of commerce and keep the doors open and the lights on.

PYMNTS reported on the firm’s results soon after they were public. But revisiting management commentary and specific sub-segments of the reported data — specifically Square Capital and Cash App — shed additional light on where merchants see opportunity and challenge right now.

The Great Pivot

CEO Jack Dorsey said that the shelter-in-place orders that came to mark the end of the quarter slowed foot traffic to the company’s sellers. But, he added, firms across the retail, quick-service restaurant (QSR) and spirits segments pivoted to launch online ordering with speed by building web sites in the span of a day (or less) and offering delivery and curbside pickup.

“Larger full-service restaurants opened community markets to sell raw ingredients, produce and food staples through online stores,” he said.

Square itself started to offer curbside pickup and delivery options in its Square Online Store. The company also launched a gift card portal in order to help buyers search for and support Square sellers.

The great pivot came as the quarter started off strong, as noted by Chief Financial Officer Amrita Ahuja, with growth logged in January and February before the massive slowdown hit in the last two weeks of March. Seller gross payment volume (GPV) declined by 39 percent year on year. Card-present volumes were down by 60 percent year over year. The pivot toward online sales saw online store GPV surge by more than five times since mid-March. That flurry of activity came with strong adoption in hard-hit verticals, such as food and retail.

“Notably, we saw over two-thirds of Square Online Store GPV come from our recently launched pickup and delivery service,” said the CFO.

The Cash Need

And yet the great pivot has not been enough, it seems, at least for now. Management also noted on the call that the CARES Act stimulus program drove strong growth across Cash App programs, with direct deposit volumes surging by three times to 14 million customers with direct deposit access at the end of the period. Customers stored more than $1.3 billion in cash balances in April, double the tally at the beginning of the year.

During the quarter, as management said on the call, Square Capital secured Small Business Association (SBA) approval to offer Paycheck Protection Program (PPP) loans. Square said that to date, it has submitted $855 million in verified applications of behalf of 54,000 sellers. Of that total, $520 million has been approved by the SBA for 45,000 sellers. Dorsey said the average loan size was $12,000, and 50 percent of the applicants were sole proprietors while 40 percent were employers.

Hints at Financial Position

Despite the stimulus and the pivot, there may be some turbulence on the horizon. The company booked $109 million in reserves tied to possible transaction and loan losses. That reserve is about four times higher than the usual quarterly run rate, the firm estimated. Thus far, chargebacks are less than twice normal levels, but the coronavirus situation remains fluid. The reserve of $22 million tied to capital loans is also about four times the normal run rate.

The provision against possible losses comes against a backdrop where SMBs are increasingly tapping into a bailout pool that just may not be enough. In the latest survey taken by PYMNTS of SMBs, 41 percent had applied for PPP loans as of April 20, up from 32.7 percent as of April 6, just after the first PPP tranche went live.

The urgency is palpable. As many as 24.9 percent of firms said they would not survive if they do not get PPP loans. Many of the SMBs are among the smallest ones, with more than 58 percent of those dependent on PPP for survival employing a maximum of 20 workers.

Square’s results show the resilience of firms confronting the ravages of a pandemic no one imagined, but resiliency, grit and determination can go only so far when coffers are empty.