What is Square?
The six-year-old payments start-up began by offering small, square-shaped credit card readers that plug into smartphones or tablets. The device helps small businesses easily accept credit card payments.
But Square has shifted its identity in the last year. In May, the company introduced Square Capital, a money lending program for small businesses that use Square. The company has promoted Square Cash, the smartphone app that lets users freely send money to one another’s debit accounts. And on Monday, the company will introduce two services — instant deposits and protection for disputed purchases — that Square says will make life easier for small businesses.
These moves all speak to how Square now wishes to be known: as a company building services for small businesses, buttressed by the huge amount of data collected from the millions of credit card swipes it processes daily. Whether the company will rise or fall largely rests on whether those services attract new customers, all while keeping the old ones happy.
“We have a huge competitive advantage,” said Roelof Botha, a Square board member and partner at Sequoia Capital, a leading venture capital firm that has invested in the company. “No one else has the kind of visibility we have into how these businesses that use Square are doing.”
The company says it always had a focus on data. But for a time, Square was far more concentrated on consumer-facing products like Square Wallet, which simply required customers to give a merchant their name to pay for items. Square Market, too, made it easy for businesses to create an online storefront.
This approach, championed largely by Jack Dorsey, Square’s co-founder and chief executive, did not work. Square has now moved projects like Wallet and Market to the back burner, according to two people briefed on the company’s business plans.
“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.
Capitalizing on its wealth of transaction data may be the best way for Square to live up to its $6 billion valuation. Critics have said that Square’s payments business is rife with problems; the margins are too thin, they say, or new customers are too expensive to acquire.
In addition, Square faces pressure to compete with other companies like PayPal, First Data and Amazon, all of which offer their own credit card readers and accompanying services.
The chief executive of Verifone, the giant point-of-sale hardware manufacturer that once offered a competing Square-like device, called the small-merchant payments business “fundamentally unprofitable” shortly before dropping its card reader product.
Many large companies that serve small businesses feel the same way, says James Wester, research director of global payments at IDC, a research firm. “To do it well, you have to have a huge volume of merchants using your service and a lot of money to get it off the ground.”
Square has the money part covered: To date, it has raised more than half a billion dollars in venture capital. And it has had some success signing up merchants, too. Square says it serves “millions” of small and midsize business, and it processed over $30 billion in payments in 2014, growing 50 percent from the previous year.
The company takes about 2.75 to 3 percent from each payment it processes, but must split that with credit card companies and other financial institutions. Square sees approximately 34 percent gross margin after paying these institutions, according to a person briefed on Square’s business.
Still, Square needs far more customers to grow beyond its valuation, and will have to continue aggressively expanding.
That is where the company’s data-driven merchant services come in, like Square Capital. The service is essentially a cash-advance business, one where Square sends out offers of small capital extensions — usually $4,000 to $10,000 — to small businesses that use Square.
The offers are made based on data analysis behind the scenes. The company takes the information gathered from its payment processing to understand how a particular business operates, and to determine whether it is a strong candidate for an advance.
Square does well on each advance. Customers pay Square back at a fixed cost, adding 10 to 14 percent of the amount borrowed. Square also earns fees from a partner, Victory Park Capital, for finding and serving the clients. So far, Square said it had extended more than $100 million in capital to more than 20,000 merchants.
“These are the people who cannot get bank loans, and for whatever reason they’re not treated like a real business,” Ms. Friar said. “There’s an absolute market opportunity for us here.”
Square also offers ancillary data-driven products created for small businesses. The new instant deposit product, which is still in testing and will be fully available in the spring, will give businesses faster access to money they put into a debit account. And the company’s new charge-back protection service will cover some disputes between consumers and merchants.
Those products also rely on data that Square has collected. They will be available only to small businesses that have a solid financial track record, based on a history of accepting payments with Square.
And the company is expected to focus even more on data-driven products. The Square Cash app, for example, could offer new insights because it gives Square data on how people exchange money with one another. Square does not charge users to send money with the app, though Ms. Friar said it might ultimately find ways to make money from Square merchants who could accept money through it.
There is also Caviar, the start-up that Square acquired last year for around $90 million, which brings delivery services to restaurants that do not otherwise offer them. Square believes it can approach popular restaurants with the promise of aiding in delivery, and then potentially persuade those businesses to use more of Square’s products.
So again: What is Square?
The company will say it is the same thing it always has been — at least, sort of.
“I would still define us as primarily a payments business,” said Mr. Botha, the venture capitalist and Square board member. “I just think that the term ‘payments business’ has changed from what it meant in the past.”
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