Morningstar | Square is increasing its software and service offerings.
Square’s mobile phone card reader enabled small businesses to accept electronic payments for the first time, and its success in spreading through word of mouth enabled the company to acquire billions of dollars in processing volume at relatively little cost. The company’s strategy is now to widen the range of services it provides to these businesses, essentially using its payment-processing business as a beachhead to expand into other types of financial services and business software. Square’s success so far is analogous to that of PayPal in its early days. Both firms enabled previously underserved micromerchants to connect to the digital payment ecosystem, bypassing the formidable barriers associated with traditional merchant acquirers. Both also boosted convenience and security for customers. And both face obstacles in moving away from the “long tail†of small merchants. As small businesses grow, they typically require more support and service, yet they can also demand lower prices--a difficult balance for payment providers. Square lost money in a partnership with Starbucks that quickly fizzled as the large merchant found itself needing a more sophisticated offering. Square is attempting to increase its value to customers--and switching costs--by solving other problems for business owners and managers. The Square Register app provides receipts, invoices, inventory management, and analytics at no additional cost for Square customers. Other services, such as payroll and appointment management, generate additional revenue. Square is also opening its systems to third-party developers, aspiring to become a one-stop shop for small-business enterprise software. Square's focus on simplicity has paid off so far, indicating the potential for long-term success, but competition will only get more intense as its aspirations expand. We also believe marketing and development expenses will rise as the company grows and diversifies its operations--the need for salespeople thus far has been minimal, for example. However, software and other products and services offer much better margin profiles than payment processing and have the potential to increase switching costs.Square is a commerce ecosystem that combines software with hardware to enable sellers to turn mobile devices and computing devices into payment and point-of-sale solutions. With the company's offering, a seller can accept payments via magnetic stripe, Europay, MasterCard, and Visa, or Near Field Communication; or online via Square Invoices, Square Virtual Terminal, or the seller's website or app. Also, sellers can gain access to reporting and analytics, next-day settlements, digital receipts, payment dispute and chargeback management, security, and Payment Card Industry compliance. The company's Cash App enable individuals to send and receive money electronically to and from individuals and businesses.
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