Square first launched as a credit card reader that attached to the headphone jack of early smart-phones used to settle mobile transactions. Now it has rapidly evolved to become the hardware and software of choice to complete payment at your local coffee shop.
As you can see above, Square has evolved quite dramatically. As of this writing, Square’s valuation is ~10% of $Visa’s and has collected $3B in revenue in 2018, whereas Visa raked in $20B in top-line. Also in 2018, Square processed $85B in gross payment volume, whereas Visa’s processed 130x as much — a staggering $11 Trillion. To reach this milestone, Square has expanded beyond being the starter kit for mobile businesses into a payment and services ecosystem for merchants AND consumers.
If they had listened to the price sensitive merchants, they would’ve focused on lowering fees. Instead, Square had the foresight to build its business model around solving for friction in the exchange of money , while the incumbents focused on exploiting their legacy business models of scraping interchange fees and charging overbearing interest. Square has developed and acquired an ecosystem of products that support its mission of making commerce easy, fast and affordable.
We believe everyone should be able to participate and thrive in the economy. No one should be left out of the economy because the cost is too great or the technology too complex. —
Below I’ll contextualize three product innovations — Cash App, Caviar and Weebly — and attempt to link them to my hypothesis of Jack Dorsey’s master plan: launching a closed loop payments competitor to Facebook’s Libra Coin. — A closed loop payment system is one where transactions remain within a controlled ecosystem, which cut costs by reducing the number of middlemen.
The Cash App is gearing up to be blend of Venmo and Coinbase. Send money to your friends, colleagues and family while buying your next fractional Bitcoin, all by a few taps within the same app. Square is growth-hacking virality using the same strategy PayPal employed in their early days: paying their users $5 cash-money to refer their friends. Square can afford this customer acquisition strategy with $500M of cash sitting on their Balance Sheet. For those not in the know, Venmo is a digital wallet that lets you make and share payments with friends and Coinbase is an app that allows users to buy, sell and store under-researched cryptocurrency purchases. Coinbase makes its money through transaction fees while Venmo is testing different strategies in monetization — current one being ‘Pay with Venmo’ as a payment option on trendy D2C check-out pages.
By the way, Square sold $166M of bitcoin in 2018.
The Cash App is the gem that positions Square as a first mover for a closed-loop payments system with massive scale with outlets of distribution. Imagine paying for your weekend latte with the $5 that you received moments ago from splitting the bill with friends. Not impressed? Me either. Let’s take it a step further.
Now imagine those $5 transactions are aggregated and used to direct deposit wages to the employee that made your latte a few minutes after they clock-out. The main reason why that’s not possible right now is because the existing banking infrastructure cannot affordably provide that option. Approximate rates that employers pay for payroll processing is $5 per pay cycle per employee. It’s not a stretch to believe that the immediacy of payments would be a popular perk for gig economy workers and the millions of American’s living paycheck to paycheck.
More-so, Square will accumulate a more integrated set of consumer data by marrying credit card transactions with P2P transactions among friends while charging negligible fees.
Currently, the Cash App is being used as the digital wallet for Square’s Caviar workforce. Caviar is Square’s early foray into food delivery -2011- which is essentially a replica of Uber Eats without the staggering 149% YoY growth. However, Caviar does provide Square a controlled environment for it to test the future of frictionless commerce. According to its website, couriers that ride for Caviar earn $25/hr which is made available in the Cash App immediately after services rendered. Granted, the market of Caviar couriers isn’t going to dent the user base that the Cash App needs to compete with Venmo, but it reinforces a use case and is a learning opportunity for improving the fluidity for gig-economy work.
This use case of a closed loop payments ecosystem gives Square an opportunity to save on payroll processing fees while differentiating from other delivery services charted above by offering a major perk: instant payment.
Lastly, Square’s management team has acknowledged the shrinking physical retail landscape could inhibit its mission to make commerce simple. Thus, they’ve decided to explore servicing the digital store front by acquiring Weebly, a do-it-yourself website development tool used by weekend warriors to get their D2C ideas off the ground. Shopify, Wix, and Squarespace Inc. have joined Weebly in democratizing access to the website development space by offering similar functionality in services, accounting, and inventory management. However, Square has one dramatic advantage:
Companies using Square Terminals that are entering the digital arena face little switching costs when utilizing Weebly because it seamlessly integrates inventory, reporting and payments. This seamless integration attempts to create a product moat for Square by providing product stickiness for its customer base. Here’s how easy it is for businesses to link their Square account to Weebly. Don’t blink, you’ll might just miss it:
On the other end, Square’s economic moat is challenged by Shopify’s entry into physical retail with it’s retail kit that eerily mimics Square’s aesthetic. Time will tell if Shopify can gain adoption and gain market share away from Square. But one thing is for certain, Shopify will be able to leverage its existing 500K active businesses using its product as a qualified customer list.
It’ll be paramount for Square to crack the nut of a retail consumer being able to spend their Cash App amount seamlessly in store or online to become a closed loop payment provider. Otherwise, they’ll be retired as a stepping stone in the evolution of payment processing.
In my mind, Jack Dorsey and the Management Team at Square don’t have to have this all figured out — this space is evolving fast and they seem to be adept in rolling with the punches. We still don’t know how adoption of Facebook’s Libra coin will turn out nor how cryptocurrency is going to further shake-up the P2P space. I do know that Square will need to execute flawlessly to not only grow into it’s $30B valuation, but also compete toe-to-toe with it’s growing list of competitors: Visa, Shopify, UberEats and Stripe. For the sake of innovation, Long Live Square.
Disclaimer: I am long $Square and Jack Dorsey