Square sets its sights on SME banking

Over the weekend I visited a small country town in Southern New South Wales, Australia, called Kangaroo Valley. As you’d expect, given the name, you’ll find plenty of the famous jumping marsupials wandering the countryside. But if you grab a torch and head out after dark, you’ll also bump into a surprising number of very large wombats waddling about the place. And they are very odd creatures indeed.

But aside from the entertaining fauna to be found in this part of the world, the next best thing about country towns like Kangaroo Valley is the opportunity to peruse the Saturday local market. Here you’ll find yourself treated to paddock to plate sausages, homemade pickles, grandma’s afghan biscuits and vegetables straight from the back garden.

Of course if you’re a city girl like me, chances are you’ll forget to bring cash. But thanks to technology, even in isolated places like Kangaroo Valley, enjoying the historical charm and village atmosphere doesn’t have to extend to inconvenient payments anymore. As it turns out, even Square has infiltrated this part of the world, with their small and handy card readers. I paid for more pickles, olive oils and cheeses than I probably really needed to thanks to this little white box.

And hasn’t Square had an amazing trajectory from its early marketplace roots, now a real contender in the payments and small business finance market. It’s latest Q2 results saw it post revenue of $552M, with the business adjusting its full year revenue outlook for 2017 upwards, to $925 million to $935 million, up from earlier guidance of $890 million to $910 million.

Compared to a year ago, the stock is up 140%, with many expecting it will continue to outperform. While it currently trades at around the $27 mark, some analysts think it can push to $33.

What will be interesting to watch is whether Square’s latest move into banking will convince the market it can make more inroads into the small business sector, beyond payments and lending. One thing is for sure, damming up those payments in the form of deposits, so as to access cheaper funding will be something on its mind for sure.

But the bigger play, and something Square has been positioning itself for, for sometime now, is the integrated ecosystem of services game. Because Square is much, much more than just the financial component. It encompasses all the other services these rivers of money flow through – from point of sale, to payroll, to analytics services and more. It’s the ecosystem a bank wishes it could build, just can’t.

In this day and age, the secret sauce, which no doubt Square is hoping will prove to be true, is that you have to start the other way around. No use attacking a bank by becoming a bank. First become everything else a bank isn’t from a market place offering perspective, then become a bank. Then perhaps one day you’ll have a powerful enough model that can truly unseat an incumbent. And with this latest news, maybe that day is close to arriving.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

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