E Deriving Square's Growth Potential By Comparing It With Customer Banking

Square's Business Model

Source: Square Investor Update March 2020

Square (SQ) is divided into the B2B section of the company, which offers services and products for small businesses and its consumer segment. The company has become known for simplifying payment processing and has been adding many related services. Some include handling payrolls, planning of appointments, and billing. Also, Square Capital offers loans to small firms, which are tailored to the individual customer based on the data collected. 

However, the more exciting part of Square is the consumer segment, which currently makes up only 14% of Square's revenue. Square launched Cash App in 2013 to expand its business and to address consumers. The long-term vision is to digitalize the retail banking sector and to offer services in a more transparent and accessible way. An individual should no longer have to go to a bank but should be able to make all financial transactions online via Cash App. 

Cash App currently includes functions to enable P2P transactions, investing in stocks and Bitcoin, direct deposits, and discounts through Boosts. Furthermore, there is the Cash Card, Square's debit card.

Banks as a benchmark for future growth potential

There are many approaches to value Square and calculate its growth potential. Due to the company's vision, Square can be compared to traditional banks. Most banks report sales of their consumer banking business, which includes revenues generated by small businesses. The consumer banking part of banks is, therefore, comparable to Square's business. To get a correct comparison, I subtract all revenues generated by the Bitcoin segment of Square. Unlike banks, Square makes a large percentage of its revenues through its Bitcoin business. Furthermore, it is still very questionable to what extent Bitcoin will prevail and whether this segment will continue to be in high demand. In my analysis, Bitcoin is consequently not considered and can be seen as a blind card.

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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SQ over the next 72 hours. 

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John Doe 5 months ago Member's comment

Really interesting article! Are consumer banks also a threat to enter the electronic payment market?

Robert Templin 5 months ago Author's comment

Hello Noah,

As shown in the chart "Top 10 Financial Institutions by Number of Active Digital Users (2019)", some banks are already in the electronic payment market. However, Cash App and Venmo, in particular, are taking market share, as their products are much more functional.

Susan Miller 5 months ago Member's comment

Isn't Venmo a competing product to PayPal? Yet doesn't PayPal own Venmo? Confused.

Robert Templin 5 months ago Author's comment

Hello Susan, Paypal does own Venmo. Venmo was bought buy Paypal in 2013. By buying Venmo Paypal was more or less able to cripple the competition and expand its own growth. But yes, you are right, overall the functionalities are pretty similar.

James Goldstein 5 months ago Member's comment

Impressive. Bullish on $SQ.