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.

Square launches in Australia – what will make or break them down under?

After establishing a local presence about a year ago in Melbourne, Square have finally made it through local regulatory hurdles and launched their Square Reader in Australia, specifically targeting small businesses.

Of course most of us are familiar with the Square story. From payments upstart to fintech darling, a question mark still remains on whether it can build a sustainable and profitable business. One thing however is absolutely certain – Square is growing rapidly. Analysts expect Square, who reports its Q4 earnings today to announce revenue growth of 37% compared to the same period in 2014, taking the business from $250.9 million in sales to $343.2 million.

So what does the Australian market place hold for Square? Where can it win, where will it struggle? Below I present three key market dynamics that are important to consider when evaluating the Square strategy down under.

High contactless card penetration

Australians have a love affair with contactless cards. Currently the Square Reader doesn’t support tap and go transactions and this could be a hurdle. Why? Well, according to one of Australia’s largest supermarket retailers, and second largest payments player, Woolworths, more than 80 per cent of customers are using contactless technology at their checkouts – a good barometer for the rest of the retail card present sector. Woolworths estimate this saves a customer up to 6 seconds on each transaction. While time constraints might not be a game changer for a market stall holder looking at implementing Square, quick service venues like cafes and busy retailers will be hard pressed to look past the efficiency contactless transactions offer them. The good news? Some card payments under $35 won’t require a PIN at all, so this could go some way to alleviating the lack of contactless functionality, for now.

Complex credit card and debit card pricing

Here is where Square has the potential to blow the point-of-sale and payments sector out of the water. To begin with, Merchant Service Fees charged by banks for card payments are confusing. Most merchants could find themselves on either a flat fee, a normalized interchange plus an acquiring fee, a wholesale interchange plus an acquiring fee, plus a crazy number of variants in between.

On top of this, banks rarely attempt to make it easy for merchants to understand their monthly statements or opaque pricing structures. By making pricing straightforward and bundling the cost of the point-of-sale into the monthly fee of 1.9%, not only is it harder to do a straightforward comparison to the bank, but it makes managing overheads simpler and less variable month to month for the business owner.

Like minded competitors

Square has competitors in the local market who have already had time to gain traction. They are arguably also more flexible than the Square Reader, given they are open to integrating with other point-of-sale vendors. The two most well-known fintech payment disruptors are PayPal Here and Mint Payments. So far PayPal has integrated its card reader with Vend, one of Square’s key global competitors. Mint’s most publicised tie-up is with Xero’s main competitor, MYOB, via its cloud accounting product AccountRight.

It’s really a question of whether Square thinks it can be everything to everyone, or if integrating best-of-breed platforms is the better play. The jury is still out on that front. On the incumbent banking front, Australia’s largest bank, Commonwealth Bank has also been no tech-laggard. Its Albert EFTPOS tablet also presents a compelling all-in-one point-of-sale and payments solution, with an AppBank designed to let merchants customize their desktop experience.

The Square solution is a compelling suite of products for a sub-sector of Australian merchants, especially those starting up or who require a fully mobile solution. Using this product suite to disrupt the incumbent credit card processing market will be more difficult, and is probably not Square’s end game in the Australian market, yet. Given technology moves faster and faster, investing in hardware rather than software can become a lag on a business model, especially given the time it takes for new payment terminals to become compliant. Square however, unlike the incumbents, is well positioned for the new wave of mobile payments, where card readers are obsolete. This will be the play to watch in the next few years.

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.

SmartPesa could bring the Underbanked into the credit economy

SmartPesa hails from Singapore, the next stop for the Fintech City Tour.

From the name, I assumed SmartPesa was something to do with M-Pesa, but it seems to be just a clever way to say SmartMoney (pesa means money in Swahili). Thorsten Neumann of SmartPesa pointed out that Swahili is a language spoken by +-100mil people in East Africa.
Africa is a big market. According to BCG (Boston Consulting Group) there will be 400 million mobile phone owners in the region with an income of at least $500 a year by 2019.
Although SmartPesa is based in Singapore, Thorsten spent 3 years in Rwanda/Democratic Republic of Congo, so he knows the market in Africa where M-Pesa is the game-changer. Thorsten pointed out that their opportunity was in all the emerging markets including SE Asia and Central America, not just Africa.
SmartPesa is like Square for the rest of the world.
There is a physical SmartPesa device that plugs into the phone, just like Square. However, the differences with Square illustrate three interesting trends in Fintech:
  • SmartPesa is compliant with EMV L2 chip cards. This is rather than the antiquated mag strip technology that is now only used in America and which even America will start phasing out from October 2015 onwards. Square is obviously gearing up to offer this as well. This is one market where America is playing catchup.
  • SmartPesa works through Banks. The Banks do the merchant acquiring. Square does its own merchant acquiring. Startups without access to large pools of VC money are likely to take a cooperative approach with Banks rather than trying to replace them entirely.
  • Mobile disruption. The countries that leapfrog to mobile are more likely to invent the game-changing innovation because necessity is the mother of invention. In America, it was niche markets (such as Farmers Markets) that needed Square; most retailers already had fixed line POS.
The key to M-Pesa is those 40,000 agents (in Kenya alone) who operate the small roadside shops where you can cash out your M-Pesa digital currency. These roadside shops are ubiquitous in emerging markets. These Micro Businesses are key to economic growth in these countries. They are like a decentralized Walmart. They do everything via mobile phones and via cash (or mobile money cash equivalents like M-Pesa). That is why a venture like SmartPesa that aims to bring these roadside stands into the credit economy is significant.

PayPal, Square and Stripe – the disrupters who maybe disrupted by Bitcoin

Both Square and Stripe are in the WSJ Billion Dollar Club (but that may not mean as much when you look below the surface). eBay will be spinning off PayPal, so we will soon see how good it is as a standalone public company (or if it gets acquired we will see the valuation).

The valuations given to PayPal, Square and Stripe do not allow for any execution missteps and assumes that they are the disrupters up against sleepy old legacy companies.

How time flies. It is possible that the disrupters are being disrupted.

Facilitating payment by Credit Card is incremental innovation.

Obliterating Credit Card fees using Bitcoin is disruptive innovation.

Here is the brief history of Credit Card innovation post Internet:

  • Paypal. Any small e-merchant can collect payment online using credit cards.
  • Stripe. Any developer can build the functionality that enables any small e-merchant to collect payment online using credit cards – so that the process for consumers and merchants is less aggravating.
  • Square. Any small p-merchant (“physical merchant”) can collect payment offline using credit cards.

In a world where we will always use credit cards via Visa, Mastercard and Amex, these are all game-changing innovations – which will attract premium valuations.

In a world where credit cards as we know them today is a subject that we teach our kids along with the concept of a fax or telex machine, these start to look like rearranging the deckchairs on the Titanic – and they will be valued like legacy behemoths but without their massive clout and market reach. Oops!

It started to look like this game was changing, when I witnessed a “war by Press Release” between Stripe and PayPal over who was going to be first to accept Bitcoin.

Then there is Stripe betting on Stellar. It is hard to decipher a clear game plan from Stripe.

Square maybe making the right moves. They are adapting their POS to allow both Bitcoin and Apple Pay. That will be welcome to merchants in America, faced with a switchover to EMV.

Disrupting payments is tough.