Square, Inc.: The Making of a Big FinTech for the Small Business Segment

December 24, 2019


Section 1


Square, Inc., one of the first PayFac players, was founded in February 2009 and went public in 2015. The company started with the aim of enabling small businesses (sellers) to accept card payments. Since then, it has expanded to provide additional products and services to its customers’ access to a cohesive ecosystem that helps them to start, run, and grow their businesses. In its current form, Square is a commerce ecosystem that successfully combines software and hardware and enables merchants to turn mobile and computing devices into point‐of‐sale solutions. This wide spectrum of capabilities has done well for Square. Consider this: Square, Inc.’s current market cap is $28.9 billion; it has over 2 million merchants and has registered over 60 million downloads of its Cash app since inception; as of December 31, 2018, Square had 3,349 full-time employees, and it is currently a darling stock of investors due to its tremendous performance in the past.

Square’s Growth Story

Square’s founders identified the opportunity in the payments market for small-business customers who were struggling with the number of payment options available in the market. Square started offering a card reader product that can be plugged into the headphone jack of the increasingly popular and innovative product – iPhones. The product was free for merchants, and Square made money by taking a percentage and fixed 15% on every transaction made through Square. The fixed fees of 15 cents were withdrawn when Square’s readers picked momentum in the market. The process was extremely simple for small merchants as it did not involve any lengthy documentation and setup process or extra fees. A simple UI, sleek design, and the popularity of iPhones provided the push for the accelerated growth of Square’s product. By 2013, Square was processing $15 billion per year.

Soon Square started building an ecosystem of hardware and software products that could serve both small and large-size customers and manage all of their payment processing requirements. Thus came standalone POS, payment stands, payrolls, virtual terminals, dashboards, and many more products and services.

Analysts rightly point out the distinctive traits and growth story of Square,  saying, “It isn't easy to be edgy and successful in this sector, but Square is managing, and it's getting a lot of investor love for it.” In 2015, the company went public.

Since its IPO, Square’s stock price has appreciated by ~440%, outperforming the GSPC index by a huge margin. However, the journey was not linear, and Square’s stock indicated skittish investor traits. For example, Square’s stock prices declined by 20% in August 2019 despite its strong performance in the last quarter that exceeded analyst expectations. The decline was attributed to Square's slightly lower than expected guidance. Some analysts said the market was ‘overreacting’ to the guidance. A similar decline was registered in August 2018 when Square’s CFO announced to step down. This was coupled with trade tensions with China and economic slowdown in the US. Square’s stock indicates sensitivity to market fluctuations and even small incidents due to its high-growth record and exposure to small businesses. In December 2019, CEO Jack Dorsey announced that he would be away from Square for six months, which has left analysts and investors in a worried state.

Square’s stock has tanked on multiple counts in its short lifespan so far. Two years ago, the major worries were around profitability. In 2015 and 2016, Square posted the biggest losses. But Square soon managed to recover due to the growth of its lesser-known business: Square Capital.

It is important to note that in August 2019, Square sold its delivery business ‘Caviar,’ considering it as a drag on its profitability. 

Products and Revenue Streams

1. Transactions: It generates revenues through transactions via phone or tablet; via invoice; remote credit card; through the phone or computer; through website; and payment platform.

2. Hardware: It generates revenues from hardware that include a reader for magstripe, reader for contactless and chip, and a stand.

3. Cash App

It enables individuals to send, store, and spend money in a digital way. Individuals can sign up for a Cash App account using their email ID or phone number, which allows customers to onboard in a time-efficient manner. Users can receive direct deposit payments (such as payroll from an employer) or ACH payments from financial institutions. The company generates money when:

  • Customers transfer funds to their bank account via instant deposit
  • Customers make purchase transactions with cash card
  • Customers complete P2P transactions using a credit card
  • Customers buy bitcoin within the app and 
  • Businesses use Cash App to accept payments from their customers

4. Services and Subscription

Its services and subscription business include the following:

Online Store: Square allows the business to create an online store with e-commerce tools in one place. It allows businesses to build websites fast, edit, and update instantly along with website design.

Business Debit Card: Square allows users to order a card once the customer has set up an account on Square. The card is linked to POS so that the business revenue is available right away. Square Card doesn’t charge minimum balance fees, overdraft fees, or any other service fees and allows you to transfer funds to customer-linked bank account anytime with instant deposit for a fee per deposit. Or it allows the user to choose for depositing money in one to two business days for no additional charge.

Capital: Not many people know about this growing business line of Square. For eligible Square sellers, Square Capital offers exclusive access to business loans to grow their business. Square offers the capital for a flat fee with a pre-determined by a multiplier called factor fee, following which percentage of each payment that will go toward repaying the loan and fixed fee.

“Since its public launch in May 2014, Square Capital has facilitated over 650,000 loans and advances, representing $4.0 billion.”

Installments (EMIs for customers of merchants): It works everywhere where the business can accept payments through Square. Square helps the business to send the program to customers, the customers then fill a short online application from their own device (rates vary from 0-30% APR) and if they are approved and accept the plan.

Payroll: Square Payroll is a quite advanced payroll software that works with every business which enables business to pay employees & contractors, pay salaried & hourly employees, offer health and other benefits, give employees online accounts, track employee hours, import timecards & tips, pay the team with its mobile app, send unlimited payroll runs, and get automated tax filings.

Marketing: Square allows businesses to create, send, and track email marketing campaigns through its marketing software. This is priced as $15/month (0–500 contacts), $25/month (501–1000/month), and $35/month (1001–2000 customer contacts).

Loyalty: Square allows businesses to create a loyalty program from its POS and allows businesses to track data like total loyalty customers, loyalty rewards, and top loyalty customers through its dashboard. The pricing is $45/month/location (0–500 loyalty visits), $75/month/location (501–1500 loyalty visits), and $105/month/location (1501–10,000 loyalty visits).

Dashboard: Square provides a dashboard to its customers, which has quick insights and advanced sales reports. It’s business intelligence software that comes free with a Square account along with Square Analytics.

Customer Directory: Square provides customer directory that allows businesses to find all contacts in one location, sync with square products, helps in understanding the customers and build directory.

Inventory Management: Square provides a free inventory management tool that allows businesses to manage inventory from any computer, download reports on current inventory and update inventory quantities in bulk, and receive a daily stock alert email detailing items that are low or out.

Photo Studio: Square provides a photo gallery option to its customers where the business can ship their product to square, square then shoots it. Square has 360-degree photos that businesses could use on websites.

Gift Cards: Square offers its customers gifting programs with online and plastic gift cards that could be purchased by the customer of businesses in-store or could be sent by the business directly through email.


Square also offers a marketplace of connected apps that can be connected in a few steps, sync the business data, and manage apps from the Square dashboard. The marketplace apps are an additional cost to the customer. Segments are mentioned below:

Sales and Marketing Channels 

Square, Inc. primarily relies on its brand name to attract customers. Direct marketing, both online and offline, has also been an effective customer acquisition channel for Square, Inc. Square hardware products, such as contactless and chip reader, Square Stand, or Square Register, are available at over 24,000 retail stores such as Apple, Amazon, Target, Walmart, and others. Its direct sales and account management teams contribute to the acquisition and support of larger players. In addition to these direct channels, Square works with third-party partners and developers who offer Square’s solutions to its customers.

Banking License

In late 2017, Square applied for permission to operate an industrial loan company (ILC). The ILC is a form of a corporation owned by non-banks that can accept deposits, make loans, and conduct other activities usually reserved for banks. Later this application was withdrawn, citing ‘technical reasons.’

In December 2018, Square again filed for the banking (ILC) license. Obtaining the license can help Square dramatically ramp up the lending activities. Currently, Square lends through its partners, such as Celtic Bank (an ILC).

Financial Performance

Square Earnings 2018 (4 quarters) vs. 2019 (2 quarters)

  • Revenue from subscription and services is increasing. It went from 17.9% to 22.04% of the total revenue, which is an early indication that a proposition to make money from value-added services and subscription (Saas play) could be interesting (online store, business debit card, capital, installments, payroll, marketing, loyalty, dashboard, customer directory, inventory management, photo studio, and gift cards).
  • Transaction-based revenue is the biggest but decreasing in share.

Historical performance

Square’s revenues have grown from $850.1 million in 2014 to $3.3 billion in 2018, at a five-year CAGR of 40.3% during this period. The company’s gross profit has grown from $226 million in 2014 to $1.3 billion in 2018, registering five-year CAGR growth at 55.0%.

The company’s net losses peaked just after IPO at 179.8 million in 2015 and $171.5 million in 2016. However, Square managed to rebound, and losses have declined in the last two years. 

Geographic and Business segments

The US remains the main market for Square, which contributes ~95% to Square’s revenues. In terms of business segments, its main business remains ‘Transaction-based’ revenues that contribute ~74.9% to the total revenues. Subscription and service-based revenue are declared as the second biggest contributor segment.

Strategic Direction

Square indicates a three-pronged strategy for the current fiscal year. It includes strengthening omnichannel commerce, expanding financial services, and growing current International markets. Let’s have a look at some of the strategic developments:

New Products Developments:

In October 2017, Square, Inc. announced that the contactless and chip reader is available to local businesses across Canada. The new reader, designed in part by Square's hardware engineers in Toronto, makes it faster and easier for customers to pay with debit and credit cards at their favorite local businesses.

In October 2017, at the Square Showroom in Nolita, Square unveiled its newest hardware offering, Square Register, a versatile, fully integrated point-of-sale, built in-house to work seamlessly with any business

In August 2018, Square, Inc. announced Reader SDK, a set of developer tools for building custom, in-person checkout experiences. For the first time, iOS and Android developers can build checkout or point-of-sale applications like self-ordering kiosks, mobile points-of-sale, in-store line-busting apps, and more on top of Square’s hardware and payments ecosystem.

In October 2018, Square, Inc. announced the launch of Square Instalments. This payment method gives its customers the freedom to pay for a large purchase by splitting it into easy, fixed monthly payments.

Partner program

In September 2018, Square announced the Square Solutions Partner Program to better connect sellers of all sizes with best in class partners that can build solutions specific to a business’s needs.

Inorganic growth

Square has done a series of acquisitions of businesses that are complementary services to its core POS system. Some of the key acquisitions are as below:

Eloquent Labs: In May 2019, Square acquired Eloquent Labs, a provider of AI solutions to augment and replace live chat customer support agents at e-commerce companies.

Weebly: In April 2018, Square entered a definitive agreement to acquire Weebly, Inc. from Baseline Ventures, Sequoia Capital and others, for approximately $370 million. 

Zesty: In April 2018, Square announced the acquisition of corporate catering startup Zesty with the aim of using Zesty’s assets to strengthen Caviar’s corporate ordering business.

Entrees On-Trays: In January 2018, it acquired a restaurant delivery service, Entrees On-Trays that provides food delivery and drop off catering from major restaurants.

OrderAhead: In March 2017, it acquired OrderAhead that powers mobile ordering for pickup at thousands of restaurants and local merchants

Framed Data: In March 2016, Square acquired Framed Data, a data science company that uses machine learning to help organizations identify when, and why, their users are leaving.

Storehouse: In June 2016, it acquihired Storehouse, a mobile app provider for sharing multimedia stories. Storehouse ceased to operate in 2016, and its teams moved to Square.

Fastbite: In April 2015, Square acquired Fastbite, a food delivery service provider. 

Kili: In Mar 2015, it acquired Kili Technology, a specialist in silicon, electronic, and software design for improvement payment processing.

BookFresh: In 2014, it acquired BookFresh, an online scheduling service aimed at small-business owners.

Caviar: One of the reasons Square bought Caviar back in 2014 was to move ‘beyond payments’ and create sources of competitive differentiation (e.g., offer food delivery in addition to payments) that would help Square better serve its sellers relative to payments-only companies.” However, this did not go well, and in 2019, Square sold Caviar.

Geographic expansion

Square revenue projections look weak for the coming year (FY2020), but the long-term outlook is positive. The company is all set to become profitable in FY2020. Square’s future looks positive with its continuous investments in go-to-market, such as marketing campaigns and reduced prices of newer hardware devices, Square Register, and Square Terminal. Square will continue to focus on building a robust ecosystem of complementary services that helps it attract new customers and keep them with the company for a long time.

Section #2

Current Affairs: Oct 15 – Nov 30, 2019

Forever Seeing Regulatory Eye

China’s central bank, the People’s Bank of China (PBoC), will use a new system to certify 11 types of FinTech hardware and software products relating to digital payments. These 11 products include em­bed­ded ap­pli­ca­tion soft­ware, user front-end software, cloud computing platforms, security carriers & chips, POS and ATMs. The applicants will go through the prototype examination and on-site inspections to get the certification.

The Monetary Authority of Singapore (MAS) may extend the $225 million FinTech funding program beyond 2020. Further funding will possibly focus on areas in cybersecurity and artificial intelligence.

The MAS, Deloitte, and S&P are collaborating to develop a prototype for a 'FinTech Research Platform.' It aims to help investors and financial institutions by providing up-to-date company information on prospective investment targets in the startup sector.

The Central Bank of the UAE is planning to open a new FinTech office to support innovation in the country’s financial services sector.

The Shanghai branch of the People’s Bank of China (PBoC) released 40 new measures to support FinTech development in the city.

The University of Hong Kong launched a new FinTech Index Series Hong Kong FinTech Buzz Index (FBI). The index focuses on local FinTech companies’ outlook on the industry and the general sentiment on the sector.

The Dubai Financial Services Authority (DFSA) and the Commission de Surveillance du Secteur Financier (CSSF) Luxembourg announced that they have entered an agreement to cooperate in the development of FinTech.

A Win for Stable Coins

The Government of Bermuda announced that they are committed to accepting 1:1 US-dollar-backed digital currencies of entities licensed by the Bermuda Monetary Authority (BMA), for payment of government taxes, fees, and services.

Another BigTech move 

Google announced to launch account checking services in partnership with banks. The project named “Cache” aims to partner with banks and credit unions to offer checking accounts. The banks will handle all financial and compliance activities related to the accounts. Initial partners include Citigroup and Stanford Federal Credit Union.

Deeper Pockets

Banco Santander announced to acquire a majority stake in the UK-based trade and foreign exchange FinTech Ebury, for 350 million British pounds ($400 million).

Riyad Bank has launched a 27-million-dollar fund program to invest in financial technology startups.

Paytm has raised $1 billion in funding from Softbank and others at a 16-billion-dollar valuation.

Next Insurance has raised $250 million in its Series C funding round from Munich Re. The company wants to use the funding to build industry-leading digital insurance products to US small businesses. This latest funding brought Next Insurance's total funding to $381 million with a current valuation of over $1 billion USD.

Automation Anywhere, an RPA solutions provider, announced that it had received $290 million in Series B funding. The current funding comes with an estimated valuation of $6.8 billion.

SoftBank Group Corp’s technology-focused Vision Fund has invested an extra $655 million in Greensill Capital, a working capital finance player. In an interview with Reuters Colin Fan, managing partner of SoftBank Investment Advisers said, “We believe Greensill is transforming global access to working capital through its innovative business model.”

Riskified, a payments & fraud-prevention solutions provider, announced a Series E funding round of $165 million. The round was led by global growth investor General Atlantic, at a valuation of more than $1 billion.

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