Square: A Tech Company And A Bank

Aug. 03, 2020 11:31 PM ETBlock, Inc. (SQ)43 Comments39 Likes
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  • Despite having several services resembling that of a traditional banking institution, Square is not just another bank. The company has abilities to offer serious competition to existing banks.
  • Usage of cash in the US still remains high and Square's TAM is barely penetrated.
  • Companies across industry types, from Amazon to General Motors, have leveraged financing and lending to boost their sales, but that doesn't make them comparable to traditional banks.
  • In my opinion, Square will leverage the strength of its Cash App ecosystem, to boost seller experience through the Cash Boost program.
  • Growth potential for Square remains strong. Dips in the stock price represent long-term buying opportunities.

Square (NYSE:SQ) has surged 10x since its IPO and is currently at all-time high levels. Yet, I believe there is a lot more where that came from, for long-term investors due to the strength in the seller ecosystem, the traction for the Cash App ecosystem and the growing adoption of cashless payments.

Transformation of Payments

The terms and methods of payments have evolved greatly over the years, with increased convenience, lower fees and ease of use being the driving factors.

Image Source

The credit card terminal was introduced in 1979 by Visa (V), but even in 2003, more transactions were paid for by check than by any other method. One of the biggest reasons for that was that credit card payment acceptance was a challenge for many businesses.

Square (SQ) was founded in 2009 to simplify this very problem for small businesses. In the last 10 years of its growth, the company has diversified into wide ranges of financial services to support businesses. We are currently in the era of digital payments and are moving towards a cashless society.

We now have electronic payment technologies like Square’s Cash App, Zelle, PayPal (PYPL), and Venmo (a subsidiary of PayPal) that are helpful for person-to-person payments (P2P payments). The adoption of these digital payment methods is still at its infancy and there are a lot more growth opportunities ahead. A Statista survey in early 2019 reveals that cash was still a popular choice in 2018-19, but I believe COVID-19 is providing a push for businesses to adopt cashless payments.

Why are companies increasingly becoming bank-like?

Small-business lending is an increasingly competitive area in fintech. PayPal has a program called Working Capital and provides loans to merchants based on sales history. Amazon (AMZN) also has a similar offering for sellers, and began extending credit to small business owners in 2011. Over the years, several Fintech players like Square, Robinhood, SoFi, etc. have applied for ways to become banks as doing so would give them better profit margins and the ability to diversify their product offerings.

  • Robinhood currently partners with Goldman Sachs (GS), HSBC (HSBC), Wells Fargo (WFC), Citibank (C), Bank of Baroda (NSE: BANKBARODA) and U.S. Bancorp (USB) to offer checking/savings accounts. The idea is simple, if Robinhood can become your bank account, then you are more likely to execute trades exclusively on its platform.

  • Let us look at Amazon.

The eCommerce giant has financial services spanning across pretty much every domain as JPMorgan Chase & Co. (JPM).

Source: CBI Research

The idea is simple. If Amazon can get you lower-debt payments or give you a bank account, you’ll buy more stuff on Amazon. Same way, if Amazon can offer you a line of credit at low interest rates, then you will be able to buy more inventory to sell on Amazon.

  • Apple (AAPL) is one of the providers of a contactless payment solution in the form of Apple Pay and also issues Apple card in partnership with Goldman Sachs. The benefits to Apple are easy to visualize. The Apple card incentivizes customers to purchase Apple products by offering interest-free monthly installments.


Further, Apple is able to obtain interchange revenue on all transactions, earn revenue through interests while continuing to accumulate additional end-user data to enhance the customized user experience.

  • Ant Financial, the banking arm of Chinese eCommerce giant, Alibaba (BABA), is the highest valued fintech company in the world.

  • General Motors’ (GM) sub-prime lending division - GM Financial accounted for 10% of the automobile manufacturer’s 2019 revenues. Several automotive companies have a financing arm, which constitutes a significant percentage of their revenues. Yet, we don’t value all these companies as we would a banking institution.

Source - General Motors 10K

By offering financing to customers, businesses can boost their sales, land larger contracts and increase their average sales transaction size. Financing allows customers to make regular, affordable payments toward the cost of a big-ticket item, instead of paying the full price upfront. Further, financing increases the company’s revenue generation as well, thereby creating a win-win situation for the company and its customers.

It is clear that there is a large segment of the population that isn’t well served by traditional banks. In my opinion, big tech could probably deliver these services better. Their platforms have reliable infrastructure and the data to help predict the services needed.

Earlier this year, Square received the nod by federal and state regulators to open a bank in Utah. The company will be able to use this opportunity to boost Square Capital to achieve increased flexibility in its small business lending program. That means Square will soon be able to originate commercial loans to merchants that process card transactions through its payments system.

Image source

Looking at the way Square ties its current product offerings together, it is clear that the company’s banking desires are to increase their relationship with customers (sellers). In 2019, Square put its Weebly acquisition to use by expanding its online store product and enabling sellers to set up their online store.

I believe every Square investor has seen the below image explaining Square’s two ecosystems.


However, I believe there are several synergies in the two ecosystems, and think the customer centric Cash App is likely to feed into the buyer ecosystem.

Source: Modified by the author

Square’s Business Segments

Seller Ecosystem

Square combines software, hardware, and financial services to create products and services initially tailored for small businesses. Then, the company realized that small businesses may eventually grow out of them and wanted to prevent that from happening. Today, Square’s seller ecosystem bundles a wide range of services including:

Software Products and Services:

  • Square Point of Sale

  • Square Virtual Terminal

  • Square Appointments

  • Square for Retail

  • Square for Restaurants

  • Square Invoices

  • Square Online Store

  • Square Loyalty, Marketing, and Gift Cards

  • Square Dashboard

Square is currently rated as one of the best POS systems overall. In this segment, Square directly competes with eCommerce enabler Shopify (SHOP) and Intuit’s (INTU) QuickBooks.

Image Source


  • Magstripe reader

  • Contactless and chip reader

  • Square Stand

  • Square Register

  • Square Terminal

Image Source

This space is quite competitive with many players, however, the important item to note is that Square’s hardware is the doorway for its suite of services.


Financial Services

This is where Square highly resembles the functions of a bank.

  • Managed Payments

  • Instant Transfer

  • Square Card

  • Square Capital

  • Payroll

Square attempts to provide a suite of services to small businesses, and competes directly with payroll giants such as ADP (ADP) and Intuit QuickBooks.

Source: Author’s design

Cash App Ecosystem:

Storing, Sending, and Receiving Funds: There is no need for a traditional bank account anymore.

Spending: Interchange revenue through the use of Cash Card. Further, there is the Cash Boost program which offers discounts to certain businesses.

Investing: Customers can also use Cash App to invest their funds in US stocks and exchange-traded funds (ETFs) or buy and sell Bitcoin.

Source: Author’s design

However, due to the ability to invest and trade bitcoin, I would say Square’s Cash App also competes with platforms popular among the younger generation such as Webull and Robinhood.

Source: Author’s design

Even within Cash App, I believe Square attempts to consolidate the typical requirements of an individual and provide all services under one roof. Cash Boost concept is at its inception at present, but the way I see it, Square can provide discounts to Cash App customers for merchants within the Square ecosystem, thereby bringing sellers and buyers together.

Based on the description of services listed above, calling for Square to be valued as a bank is like asking to value Amazon as a bookstore during its initial years and Tesla (TSLA) with any other automobile manufacturer (I still have my doubts over the latter, but will go with the sentiment for now). Even if Square is considered a bank, in my opinion, it has significant competitive advantages compared with traditional banks.

Financials and Valuation

Looking at revenue growth, Shopify leads the pack with a CAGR of 67% since 2015, followed by Square at 39%.

Data Source: WSJ

Data Source: WSJ

Square trades at a slightly lower P/S multiple compared to PayPal and Intuit despite having higher growth. I agree that 10x sales isn’t cheap, but considering the TAM for its ecosystems, it could be justified.

In the article by Louis Stevens , Cash App is noted to be gaining traction faster than its rivals during this pandemic. Square’s banking license approval and the growing traction in Cash App puts Square as a leading contender in the digital banking space. The addressable market is huge in both Seller and Cash App ecosystems and Square is barely getting started.


Pandemic Performance

Square reported a 44% YoY revenue growth in the first quarter.

Since restaurants and stores were closed during the first quarter, it wasn’t surprising that GPV was down. However, Square’s card-not-present offerings, such as Virtual Terminal, Invoices, and eCommerce API, were less affected, and the company reported to have seen an acceleration in GPV from eGift Cards and Square Online Store compared to the rest of the first quarter. Since businesses began slowly opening up since June, I expect the second quarter and the rest of the year to show growth in GPV.

Further, during the month of April, the company saw record direct deposits in Cash App, revealing that a large number of users received their CARES Act stimulus payment. This indicates ease of use and flexibility in using the platform.



While the Paycheck Protection Program loans are likely to keep several businesses afloat, the coronavirus is expected to permanently shut millions of small businesses in the next several months. This could significantly affect Square’s seller ecosystem customer base.

This may affect Square’s revenues in the near term, and probably drive the stock price lower, giving more buying opportunities for long-term investors.

The actual damage done by COVID-19 to the economy is still unclear. Yet, I am confident that the pandemic has nothing but accelerated the adoption of cashless payments and increased the purpose and meaning behind the company’s offerings. One of the most profound trends we have seen is the move away from cash payments towards electronic, ‘cashless’ payment methods. In my opinion, the biggest victim of the pandemic will be physical money.


In my opinion, Square will continue boosting its Seller and Cash App ecosystems with tuck-in acquisitions. The recent acquisition of Stitch Labs to boost seller operations management is just one among many to come.

  • Cash App could go into international money transfers like PayPal’s Xoom

  • Cash App could begin offering margin trading accounts on a subscription model

These are just examples of already existing services. Founder/CEO Jack Dorsey is a visionary and I am sure his team can come up with far bigger revolutions in global payments.

Image source

Also, Square is currently only available in the US, Canada, UK, Japan and Australia. There is a whole world of opportunities to expand.

Square may very well be a bank from a regulatory standpoint, but it surely is much bigger than your traditional bank. I see seller and Cash App ecosystems growing strongly in the next 5 years, with adoption fueled by the need to go cashless. I recommend Square to long-term investors.

This article was written by

Hidden Opportunities profile picture
Venkat Raghavan is a management consultant and individual investor with experience providing transformation assistance to finance, healthcare and manufacturing industries. With a strong background in helping transform organizations and streamline their business, investing is a passion for the author, and he enjoys identifying undiscovered opportunities and sharing insights. The author aims to focus on companies with great potential that aren't under the spotlight.The author occasionally contributes articles to Rida Morwa's service High Dividend Opportunities.

Disclosure: I am/we are long SQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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