Square’s potential and its challenges

Payment company Square made its S-1 filing with the SEC public yesterday and the document provides the first insight into the company’s financials beyond the occasional comment from executives. As usual, there’s tons of data in the filing and it will take some time for observers to parse all the contents. But there are some interesting tidbits throughout the filing and I’m going to share some of what I’ve found so far.

The core financials are typical for a fast-growing startup

The basic financial metrics for Square are typical for a fast-growing startup – that is, revenue is growing rapidly but the company is losing money in the continued pursuit of that growth and scale. Below are revenues (broken down by source) and margins for Square for the last seven quarters (it hasn’t reported results for Q3 3015 yet):

Square revenuesSquare margins

As you can see, revenues are growing nicely, but everything from adjusted EBITDA margin down to net margins has been negative for Square’s entire history. Only Adjusted EBITDA margins have ventured into positive territory, in Q2 this year. However, the trend is upward, which bodes well in general terms.

The underlying business model of the payments industry is challenging

However, one of the biggest challenge Square faces is the underlying business model of the industry it is operating in are pretty challenging. Square basically takes a percentage cut of every transaction that runs through its system (2.75% for card-present transactions, and 3.5% plus 15 cents for every card-not-present transaction), which averages out at a very consistent 3% in total. So far, so good. However, around 65% of that transaction revenue then gets paid to a variety of other parties. The largest chunk goes to interchange fees paid to card issuers and smaller amounts going to payment card networks, third party payment processors and others. That means Square’s cut of each transaction is 35% of 3%, or around 1% of the transaction value. From that, it has to cover all its costs, including the cost of subsidizing hardware (it’s always given its mobile Reader product away for free and makes a loss on its Stand Reader product), and all its operating expenses including development of future products, all its salary and overhead costs, and so on. And as the average size of its customers’ transaction volumes grow, it’s having to discount its fees below those standard fees I cited earlier. All of which means it’s stuck within a pretty narrow range of margins for its core product and there’s not much left over to cover its overhead costs, hence its ongoing negative margins.

This is somewhat par for the course for a fast-growing startup, in that achieving scale often solves the problem of profitability over time, as revenue from existing customers begins to outweigh the costs of acquiring new customers. The good news is new customers pay off their cost of acquisition within 4-5 quarters and revenue from these existing customers is growing at around 110% year on year. But, unlike many software startups, Square’s incremental cost to serve these customers isn’t close to zero – in fact, as we’ve already seen, it’s about 65% of revenue. So even though its customer acquisition costs are relatively low, its cost to serve these customers on an ongoing basis is high.

New parts of the business are promising

Partly because of all this and partly because being in the business of processing millions of payments provides lots of data, Square is beginning to diversify its offerings, which should help provide new opportunities to drive margins. Square has two major new business streams: software as a service and data products. Its SaaS offerings include Square Appointments and Square Customer Engagement, while its major data product today is Square Capital, which uses data on transaction volumes to proactively offer customers loans which get paid back through a cut of transaction revenue. Square also has its Caviar food delivery business, which takes a % of the total food order price as a fee. These new business lines are small in the context of Square’s overall business today – about 4% of its revenues combined in Q2, but they’ve grown rapidly from under 1% in early 2014, and show real promise. Even better, they’re subject to much more favorable economics (more like traditional SaaS or finance businesses) than the core payments business. And all of them will be driven by the rapidly growing total transaction volume Square is driving ($29 billion in the last four quarters). To the extent Square can keep these businesses growing, it should be able to help drive better margins over time.

Another thing that will help Square significantly over the next few quarters is the end of its relationship with Starbucks, which has had dramatically worse financials than its other transactions. No doubt Starbucks was helpful in boosting Square’s scale and giving it a marquee customer when the deal was signed in 2012 – Starbucks accounted for around a quarter of total transactions in early 2013 – but the deal has been horribly unprofitable and Square says in the S-1 that it’s not looking to renew it. The gross margin on Square Starbucks transactions have been minus 20-25%, while the gross margin on all other transactions has been positive at around 35%. The sooner Starbucks transitions to alternative payment providers, the better it will be for Square’s profitability.

Some other tidbits

I garnered a few other interesting tidbits from looking through the S-1 filing. First off, Square shares some interesting one-off data points about the scale of its business, which provide insights when taken together. In 2014, Square processed 446 million payments for a total gross payment volume (GPV) of $23.8 billion. Take those two numbers together and you get roughly $53 as an average transaction amount, which is higher than I was expecting, given I most often see Square terminals in casual dining restaurants where I’m spending much less than that. However, only 15% of Square’s GPV is actually food-related, and it’s got a pretty diverse base of customers at this point, well beyond restaurants and other small businesses. That same set of 446 million payments was processed against 144 million payment cards, which makes for an average of 3.1 payments per card, suggesting a significant number of repeat users. Combining these numbers with Square’s 3% average cut on transactions, and Square generates an average of $1.60 in revenue (and about 50 cents in gross profit) per transaction. And by the way, those 144 million payment cards represent around 1 in 5 active payment cards in the US (which accounts for the vast majority of Square’s business today, though it also operates in Canada and Japan).

What these numbers show is Square is getting a small slice of the total payments market in the US today, but it’s still managing to have a fairly significant impact and influence – hitting one fifth of all payment cards during a single year is impressive and it’s growing fast. Square sees the liability shift and the associated move to EMV and NFC terminals as a significant opportunity in the next few months and hopes to drive significant growth as a result. The big question is still whether it can do all this while also improving its margins, which will depend as heavily on its ability to drive new businesses as on its core payments segment.

Published by

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

1,606 thoughts on “Square’s potential and its challenges”

  1. “65% of that transaction revenue then gets paid to a variety of other parties….. That means Square’s cut of each transaction is 65% of 3%, or around 2% of the transaction value”

    65% transaction fees plus 65% square’s cut = 130%, i think there’s a typo there.

  2. Is there any perspective of lowering costs on the back end, maybe by becoming a bank or a credit-card processor ?

    1. Not substantially, because all the other banks and other credit card processors will demand their usual cut. Requiring that customers sign up for a specific card or a specific bank to use Square is a non-starter. The diversity of banks and cards being used by the users of square ensure that square is pretty much stuck with the existing fee structure.

  3. I’m really enjoying the design and layout of your blog. It’s a very easy on the eyes which makes it much more pleasant for me to come here and visit more often. Did you hire out a designer to create your theme? Exceptional work!

  4. It’s actually a great and useful piece of info. I am glad that you just shared this useful information with us. Please keep us informed like this. Thank you for sharing.

  5. This is a really good tip especially to those new to the blogosphere. Short but very precise info… Thanks for sharing this one. A must read post!

  6. An interesting discussion is worth comment. There’s nodoubt that that you need to write more about this subject,it might not be a taboo subject but generally folks don’t talk about such subjects.To the next! All the best!!

  7. Thanks for the good writeup. It in fact was a leisure account it. Look advanced to far introduced agreeable from you! By the way, how could we keep up a correspondence?

  8. I?¦m not positive where you’re getting your info, however good topic. I needs to spend some time studying more or figuring out more. Thank you for magnificent info I used to be on the lookout for this info for my mission.

  9. Hello! This ps4 games is myfirst visit to your blog! We are a team of volunteers and starting a new project in a community in the same niche.Your blog provided us useful information to work on. You havedone a outstanding job!

  10. Hi there, just became aware of your blog through Google, and found that it’s truly informative. I am going to watch out for brussels. I will appreciate if you continue this in future. Many people will be benefited from your writing. Cheers!

  11. Xoilac Tv Trực Tiếp Bóng Đá truc tiep htv 7Đội tuyển chọn futsal nước Việt Nam đã có một trận đấu đồng ý được trước đối thủ đầy mức độ mạnh Lebanon. Kết trái Bà Rịa-Vũng Tàu vs Bình Phước hôm nay 18h00 ngày 5/5, Hạng nhất nước ta.

  12. great issues altogether, you just received a emblem new reader. What could you suggest in regards to your post that you made a few days in the past? Any sure?

  13. Hi Bro, this is my 1st time coment is here i hope you are fine your post is nice . good job and nice info, i am a wp blooger and internet uesr, thanks for sharing

  14. Aw, this was an extremely good post. Spending some time and actual effort to create a very good article… but what can Isay… I hesitate a whole lot and don’t manage to get nearly anything done.

  15. Thanks for ones marvelous posting! I truly enjoyed reading it, youmay be a great author.I will always bookmark your blog and may come back from now on. I want to encourageyou to ultimately continue your great job, have a nice evening!

  16. Your style is really unique compared to other people I have read stuff from. Thank you for posting when you have the opportunity, Guess I will just bookmark this blog.

  17. An intriguing discussion is definitely worth comment. There’s no doubt that that you need to publish more about this topic, it might not be a taboo subject but usually people do not talk about such topics. To the next! Best wishes!!

  18. Hello! I know this is kinda off topic but I was wondering
    which blog platform are you using for this site? I’m getting sick and tired of WordPress
    because I’ve had issues with hackers and I’m looking at alternatives for another platform.
    I would be awesome if you could point me in the direction of
    a good platform.

  19. Také se můžete setkat například s pětikaretní omahou, nebo třeba Big O, což je pot-limit omaha hi-lo s tím, že se hráčům rozdává pět karet. Omaha se kromě limitu a pot-limitu občas hraje i no-limit, takže možností je opravdu spoustu. Často se s nimi můžete setkat v rámci mixed games turnajů na World Series of Poker. nuda goodgame poker je lepší skuste to!! 34 Copyright © 2017-2023 All rights reserved – ApkGK.Com poker je poker ide oto aby ste hrali a zlepsovali sa ne oto ake to je kratke boze tie komenty Teaches how to play Texas Hold ‘Em Poker for beginners. This title contains terms, definitions, etiquette and rules and shows how poker hands are ranked. It helps you to… Když začneš brát poker vážně, začne tě zajímat i matematika, která za ním stojí, protože poker je čistě o pravděpodobnosti a statistice. Když hraješ jen s kamarády, nemusíš o těchto věcech nic vědět a stejně tě to baví, hlavně kvůli faktoru náhody.
    Je fajn, že nabízí casino 150 bonus bez toho, abych pro to musel něco udělat. Powercasino určitě doporučuju. Maximální sázková částka na jednu sázku nesmí překročit 5 €. Projděte si všechny bonusy nabízené společností Power Casino, včetně jejich bonusových nabídek bez vkladu an uvítacích bonusů k prvnímu vkladu. Suma sumárum, software zodpovědného hraní v online casinu Power Casino bychom zhodnotili kladně, průměrně. Ne všechna moderní kasina přijímající bitcoiny nabízejí lukrativní bonusové programy, ale Power Casino je v tomto případě výjimkou. Noví hráči musí jednoduše odeslat a potvrdit svou e-mailovou adresu a telefonní číslo, aby tento bonus získali. Kromě toho existují další bonusové nabídky Power Casino, které vám pomohou výrazně zvýšit váš počáteční vklad. Zde jsou tři, které byste si neměli nechat ujít.

  20. Hey There. I found your blog using msn. This is an extremely well written article.I will be sure to bookmark it and come back to read more of your useful info.Thanks for the post. I will certainly return.

  21. Hello there I am so thrilled I found your webpage, I really found you by error,
    while I was searching on Digg for something else, Nonetheless
    I am here now and would just like to say cheers for a
    marvelous post and a all round interesting blog (I also
    love the theme/design), I don’t have time to go through
    it all at the moment but I have bookmarked it
    and also added your RSS feeds, so when I have time I will be back to read a great
    deal more, Please do keep up the awesome jo.

  22. Hey there! Quick question that’s completely off topic.

    Do you know how to make your site mobile friendly? My blog looks weird when viewing from my apple
    iphone. I’m trying to find a theme or plugin that might be able to fix this issue.
    If you have any recommendations, please share. Thanks!

  23. Will you mind generally if I quote any of your current blog posts on condition that I include acknowledgement along with sources back to your web page? My internet site is in the exactly the same area of interest as yours and my targeted visitors will take benefit from many of the content your site present in this article. Feel free to let me know if it is okay for you. All the best!

  24. An interesting discussion may be worth comment. I think that you can write more on this topic, it might be considered a taboo subject but normally consumers are too little to chat on such topics. To another location. Cheers

  25. I don’t know whether it’s just me or if perhaps everyone else encountering problems with your website. It appears like some of the written text in your posts are running off the screen. Can someone else please provide feedback and let me know if this is happening to them too? This might be a issue with my browser because I’ve had this happen previously. Thank you

  26. I have been exploring for a bit for any high quality articles or blog posts on this kind of house . Exploring in Yahoo I ultimately stumbled upon this site. Studying this info So i’m happy to express that I have an incredibly just right uncanny feeling I came upon exactly what I needed. I so much no doubt will make certain to don’t disregard this site and provides it a glance a continuing.

  27. I know this really is truly boring and you’re simply skipping to another comment, however i simply desired to toss a large many thanks — a person resolved the main things personally!

  28. I discovered your blog site on google and check several of your early posts. Always maintain on the great operate. I extra increase your RSS feed to my MSN News Reader. Seeking forward to reading much more within you down the line!…

  29. Hey good blog, just looking around some blogs, seems a fairly great platform youre using. Im currently making use of WordPress for a few of my sites but looking to alter one of them around to a platform comparable to yours as a trial run. Something in specific you would suggest about it?

  30. The luxurious introduced is literally un; rrndividuals are automatically longing for many of the Hawaiian ideal. This skill unusual vacation spot is intended immediately to grow variation and simply dominance throughout tourist business enterprise. hotels promotions

  31. A lot of thanks for your whole efforts on this web site. Kate really loves doing investigations and it’s easy to understand why. My spouse and i hear all of the powerful means you give useful strategies via your web site and even improve response from visitors on the idea while our girl is becoming educated a lot of things. Take advantage of the remaining portion of the new year. You’re the one conducting a useful job.

  32. Oh my goodness! an excellent post dude. Thanks a ton Nevertheless We are experiencing issue with ur rss . Do not know why Not able to sign up to it. Could there be any person acquiring identical rss dilemma? Anyone who knows kindly respond. Thnkx

  33. Just determined your blog site a week ago and i also may be perusing they always. There’s a a lot of information next and i really enjoy your thing through the web presence additionally. Preserve the nice employment!

  34. The when I read a blog, I hope so it doesnt disappoint me approximately that one. I mean, Yes, it was my option to read, but When i thought youd have some thing interesting to state. All I hear is often a lot of whining about something you could fix if you ever werent too busy in search of attention.

  35. My spouse and I stumbled over here coming from a different website and thought I might check things out. I like what I see so i am just following you. Look forward to exploring your web page yet again.

  36. If you happen to significant fortunate people forms, referring by natural means, additionally you catch the attention of some sort of envy in consideration of those types the other campers surrounding you which have tough times about this subject. awnings

  37. Aw, this was a very nice post. In concept I want to put in writing like this moreover – taking time and actual effort to make a very good article… but what can I say… I procrastinate alot and under no circumstances seem to get something done.

  38. Excellent stuff. I can not describe how much your site has helped me within my academic research on the subject. I am now going to get top marks for certain. Thanks a million. I owe you one.

  39. Great weblog right here! Also your web site quite a bit up very fast! What host are you the usage of? Can I am getting your associate hyperlink in your host? I wish my web site loaded up as quickly as yours lol.

  40. You undoubtedly make it look really easy with your display but I come across this particular matter to get really a thing that I do think I’d personally never ever comprehend. It appears also complicated and very vast to me. We are anticipating for your forthcoming submit, Let me try and get the hang of that!

  41. Terrific paintings! This is the kind of info that are meant to be shared across the internet. Disgrace on the seek for not positioning this submit upper! Come on over and seek advice from my site . Thanks =)

  42. Search engines Adsense not just provides key phrase precise classified ads nevertheless web site precise adverts at the same time, maximizing your own probable to get sales revenue.

  43. I think this is one of the most significant information for me. And i’m glad reading your article. But should remark on some general things, The web site style is perfect, the articles is really great : D. Good job, cheers

  44. Youre so cool! I dont suppose Ive learn something like this before. So nice to find anyone with some unique thoughts on this subject. realy thank you for beginning this up. this web site is something that’s needed on the web, someone with just a little originality. helpful job for bringing one thing new to the internet!

  45. just couldn’t leave your web site before suggesting that I really loved the standard information a person provide for your visitors? Is gonna be again ceaselessly to check up on new posts

  46. Hey – great blog, simply looking around some blogs, seems a really nice platform you may be using. I???m currently using WordPress for a couple of of my blogs but aiming to change at least one over to a platform like yours to be a trial run. Anything specifically you will recommend over it?

  47. Hi there, just became alert to your blog through Google, and found that it’s truly informative. I am going to watch out for brussels. I will be grateful if you continue this in future. Many people will be benefited from your writing. Cheers!

  48. I like what you guys are up also. Such intelligent work and reporting! Carry on the excellent works guys I’ve incorporated you guys to my blogroll. I think it will improve the value of my site

  49. Excellent article. Keep writing such kind of info on your site.
    Im really impressed by your blog.
    Hello there, You have done an excellent job.
    I’ll certainly digg it and for my part suggest to my friends.
    I’m confident they’ll be benefited from this web site.

  50. Eating foods rich in probiotics is the best way to make sure you’re keeping your gut flora healthy, however, people with dietary restrictions may need to supplement. When choosing a probiotic supplement, just make sure it contains high quality cultures and bacterial cultures that would naturally be found in the human intestines.

  51. After study a few of the blog posts for your web site now, and i also genuinely as if your method of blogging. I bookmarked it to my bookmark site list and will also be checking back soon. Pls check out my web page also and tell me what you consider.

  52. Aw, this became quite a nice post. In idea I have to invest writing in this way additionally – taking time and actual effort to produce a top notch article… but so what can I say… I procrastinate alot by no means seem to get something carried out.

  53. I simply wanted to write down a small word to be able to thank you for all the pleasant steps you are sharing at this website. My prolonged internet lookup has at the end of the day been rewarded with sensible knowledge to talk about with my two friends. I ‘d assume that many of us site visitors are undoubtedly fortunate to live in a fabulous place with many special individuals with very helpful suggestions. I feel pretty blessed to have come across your entire website and look forward to really more thrilling times reading here. Thanks again for everything.

  54. Thank you for the good critique. Me and my neighbor were just preparing to do some research about this. We got a book from our area library but I think I’ve learned more from this post. I am very glad to see such fantastic information being shared freely out there…

  55. Hello, you used to write great, but the last few posts have been kinda boring? I miss your tremendous writings. Past few posts are just a little bit out of track! come on!

  56. ในตอนนี้บางทีอาจจะไม่มีผู้ใดไม่รุ้จะสล็อตออนไลน์ เนื่องมาจากเป็นเกมที่ใครๆชอบใจเพราะว่าเป็นเกมที่สร้างกำไรได้เป็นอันมาก UFABET เว็บไซต์สล็อตออนไลน์ยักษ์ใหญ่ จ่ายจริง จัดหนัก โบนัสมาก คิดจะเล่นสล็อตจำเป็นต้องไม่พลาด UFABET ครับผม