To me the biggest question is what, exactly, Square does? Years ago they were the company that made it easy for people to accept credit card payments who otherwise wouldn't want to / be able to (mom & pop stores, farmers' markets, etc).
But you don't build a multi-billion dollar company just there, it seems that the margins are too thin and the volume just isn't there to make up for it.
Since then, they've done their Point of Sale device (not just the dongle), which I haven't heard much about. They also have their small-business-loans side--are they a bank / lending agency? They say that it's technically not a loan, but it's close enough for me.
They also do (did?) payroll services for small businesses?
I guess when I look at them I see them with a lot of irons in the fire, but with none of them doing particularly well. To me it seems like they've tried a bunch of things, none of them has really stuck, so they want more money to...do what? Keep trying them?
Full disclosure, I worked for a company for a few years that was in a similar-ish space, so I am probably biased against them. We fought a lot of similar battles, of trying to create a margin inside of credit card margins, and I'm fairly convinced that it's not a way to scale a billion dollar business.
Square as well as Stripe have really changed PoS space. Before they arrived, the devices for PoS were truely ugly, unfriendly, hard to acquire and hard to use. I see tons of small businesses converting their PoS devices to Square/Stripe ALL the time. They are like iPhone for PoS. The potential is massive. They get huge amount of transaction data which alone is probably worth a billion dollars (customer habits, usage pattern, targeting, BI etc). They can easily expand in to integrated inventory, accounting and tax system which is well beyond billion dollar industry by itself. If you visit any super market or traditional retail space, one thing that would immediately catch your eyes is arcane PoS that literally runs on Win2000 based CE code. Even though it is super critical for running business, innovations in this space have been few and far between. if you have ever even tried to use any small business accounting/tax/inventory software you would know how pathetic and 1990-ish these software are. Given small businesses have limited resources, expertise and savvyness, this space is ripe for disruption. If there was easy to use, realtime, scalable, well integrated PoS system with smart customer focused analytics putting great business intelligence on fingertips of moms and pops, it would be worth its weight in gold for businesses owners. Square/Stripe could easily outpace SAP and Oracle in market cap/revenues if they play their game right and target this market with full force. The cut in credit card translations is small and probably irrelevant part of the story.
I think the problem is that though Square really did change things there (I agree w/ you), the space now is very competitive with a lot of different players, and it's not clear what Square can do that their competitors can't. It doesn't seem like there's really much lock-in or network effects that are helping them out.
At least for a while they had powerful brand name recognition and a head start.
Bigger, badder competitors (i.e. VISA) seem like they haven't been interested in competing with Square, and you can leverage momentum & recognition against smaller newcomers.
In the case of VISA, they have to be very careful when it comes to anti-trust issues. It already cost them six billion dollars last time around.
The last thing VISA wants to do, is take over the entire payment system. That's why they're not really attempting to compete with Square or PayPal. They could trivially buy someone like Square.
VISA's golden goose is exactly where they're sitting today: no serious anti-trust burden, massive margins, low overhead brand-based business model. The minute they start trying to own everything, the goose gets shot. Today they do $5.4b in profit on just $12.7b in sales - what can a very modest business like Square offer them on top of their massive 42% net income margins to offset the anti-trust scrutiny they'd be taking on? Absolutely nothing.
If VISA tries to take over the payment processor space, Discover and Mastercard will immediately go in for the kill on anti-trust.
I dunno, I think the effects of brand recognition is perhaps overstated. I think one of the chief problems Square has run into is that while their products are great, merchants are looking at the bottom line - they would pay for an inferior but functional PoS solution if it means cheaper rates.
Square has more recognition with the public at large - but that also has little pressure on merchant adoption. After all, you're not going to refuse to swipe your card at the coffee shop because their PoS isn't Square.
Anecdotally over the past couple of years I've seen a proliferation of other PoS systems (all iPad-based) at merchants around me that are decidedly not Square. Square may have carved out the market initially, but the vacuum is being rapidly filled with players that aren't Square.
I think you really hit it on the head, Square really needs to integrate a real inventory, accounting system and you might have a real winner. I've used all the competitors, but so far go back to square. Their software is great for small inventories, but do no scale well. Intuit's software is pretty antiquated and integration is really pathetic and they are really dishonest with their fees.
Square more ancillary offerings are really terrible though, like their online store and loins. They are also offering more services with "hidden" fees like instant deposit which they charge an extra fee if you read the fine print. They are also losing out in online transactions with google, amazon, visa, mastercard, and amex doing half ass jobs.
The B&M marketplace is in for a big shift with the chip and pin starting to commence. I've only used it twice, but so far the machines that read them are ridiculously slow and cumbersome. I'm still waiting on my Square reader to see if they have a good solution.
This is a big pie, and Square needs to capitalize on its good start if not be overuse by the old goliaths.
They can easily expand, but they already have established competitors in that space, such as Xero and Quickbooks. Give a shot to Xero, it definitely has all the things you desire for.
Re: their small business 'loans' -- with the caveat that I am not an expert:
The "loan" distinction is important not for semantic reasons but practical one -- they are offering small businesses cash advances. These are different from loans because they are not secured. There are no assets put up as collateral. However Square believes they can do this better than other services because they can effectively secure the advance by taking a piece of each card swipe at the merchant's point of sale system. But if the business goes under, Square has no claim on any assets.
I don't totally understand why/when merchant cash advances work, but I believe that adequately captures the 'how'.
Square only offers an advance based upon your cash flow history. There is still risk, but they recoup their loan at a pretty good pace which makes the implied interest rate very high. But- it can be a good deal for the vendor anyhow because it is unsecured, and there is guaranteed cash flow with which to repay it. If you don't make any money, you don't pay anything.
But square appears smart enough only to give the money to people who are fairly certain to have stable enough cash flow to make it work.
On the one actual square example I've seen it looks like the repayment is on the order of 6 months, and is a total of roughly half a month's cash flow.
> If you don't make any money, you don't pay anything
With the transactions, and hence Square's information, being several days ahead of the cash settlement, they might have preferential access to cash in order to recoup from a business that is about to fail.
> However Square believes they can do this better than other services because they can effectively secure the advance by taking a piece of each card swipe at the merchant's point of sale system.
Payment processors have been active in the merchant cash advance space for a long time. What you describe (split withholding) is not new, nor is it something that only Square does. Where split withholding isn't available, merchant cash advance providers set up lock box accounts. This is not a complicated process.
Also of note is the fact that according to Square's S-1, it "fund[s] a significant majority of these advances from arrangements with third parties that commit to purchase the future receivables related to these advances."
Seeing a business' cash flow should give you great insight into their ability to repay. Just a few of the things you can calculate that a bank can't: microtrends in income, repeat customers (and trends thereof), changes in transaction size as well as volume, etc. Plus it's easier to collect on that loan.
1. Square provides merchant cash advance. This is not a loan.
2. Payment processors like Square have knowledge of a company's credit card receipts but cannot determine a company's cash flow unless they obtain additional documentation from the merchant. Calculating cash flow requires not just incomings but outgoings of cash. Payment processors obviously don't have the latter.
3. Merchant cash advance is a last-resort financing option for small businesses. Despite your implied suggestion that merchant cash advance providers have underwriting advantages over banks, there's a reason merchant cash advance is frequently the most expensive form of small business financing.
I don't follow why a bank can't see cash flow? I live in Australia, and here almost everyone is using PayPass by MasterCard or PayWave by VISA - both are contactless PINless card payments. All those transactions have to go in to the merchants bank account.
Um, sure -- but they get bulk deposited, not individual transactions. The merchant account is what sees the individual transactions, and that bank generally isn't the one businesses go to for loans afaik.
Basically, small business services of all kinds are on the table. Their job is to make it easy to run a small businesses. The first product was the little reader you put in your iPhone. It's been expanded since then, but the market is essentially "everything that small business owners struggle with".
In the bay area, a good deal of the restaurants I eat at use square. So do the farmers markets, food trucks, and my coffee shop. I probably personally spend $200 a month through square and $50 through breadcrumb, so there's room to grow.
Key words being 'bay area', which is in no way representative of the market Square needs.
Another challenge for Square is that their core merchants are mom & pop coffee shops or like you said, food trucks - not particularly lucrative segments.
Square's POS can never compete with full-service POS (Aloha, Micros), and even in the quick-service market there is increasing competition (Clover POS, Revel etc). That's why they've moved into payroll, HR, time-tracking, albeit the $5 per employee is ridiculously expensive for SMB's.
Square will obviously have to grow more, but the reason I think they have a future is they're getting merchants who didn't take cards to take them, easily and cheaply. My family is not on the coast and there's still a lot of places that don't take cards for whom square should be a really good solution. Then they can do the classic microsoft strategy: start with the smallest/cheapest and relentlessly move upmarket. Will they ever be the solution for Safeway with hundreds of stores and a very complex discounting system? Probably not. But there's a lot of smaller businesses. Small to medium restaurants should be a key target customer.
Here in Denver I see it all the time. I actually don't really notice it (a problem for them as so many competitors directly cloned them)... until that email receipt arrives.
It's not ubiquitous here, but it's certainly common.
I agree that their product set is unfocused to their detriment. But I would disagree that core payment processing is small or low margin. In fact, their margins are north of 30%. And small business payment processing is massive even without considering international and online, two massive areas where Square has completely dropped the ball.
I don't love the lending business because it seems a bit outside their competency but I can understand continuing it since it's currently hot and they do have decent visibility into borrower ability to pay, etc.
It seems like a good strong business could have been built on the initial function of accepting credit card payments. What if (I wonder) Square had stuck to that and not tried to become a huge multi-billion dollar company? There's lots of room in the world for modestly sized companies making respectable profits.
> To me the biggest question is what, exactly, Square does? Years ago they were the company that made it easy for people to accept credit card payments who otherwise wouldn't want to / be able to (mom & pop stores, farmers' markets, etc).
I'd like to see them get into the enterprise space and build a subscription management platform in the same space as Zuora. They certainly have the domain expertise, design, and engineering talent to do this.
But you don't build a multi-billion dollar company just there, it seems that the margins are too thin and the volume just isn't there to make up for it.
Since then, they've done their Point of Sale device (not just the dongle), which I haven't heard much about. They also have their small-business-loans side--are they a bank / lending agency? They say that it's technically not a loan, but it's close enough for me.
They also do (did?) payroll services for small businesses?
I guess when I look at them I see them with a lot of irons in the fire, but with none of them doing particularly well. To me it seems like they've tried a bunch of things, none of them has really stuck, so they want more money to...do what? Keep trying them?
Full disclosure, I worked for a company for a few years that was in a similar-ish space, so I am probably biased against them. We fought a lot of similar battles, of trying to create a margin inside of credit card margins, and I'm fairly convinced that it's not a way to scale a billion dollar business.