Square Takes a New Shape in 2015

Square is committed to its diversification strategy, furthering its transformation from a simple mobile point of sale provider to a company that also handles small-business loans, marketing and e-commerce.

But the company, which popularized the off-the-shelf mobile card reader, still fights the longstanding perception that its business model is unsustainable, and it will be better off absorbed by a mainstream financial services provider.

A main focus for Square in the coming year will be educating its merchants about the various services the company now offers, said Square spokesperson Faryl Ury.

"They know about the Square mobile card reader, but we wanted to make sure they know what they get with Square Register," the company's mobile app, Ury said. Square Register operates as a full point of sale system with added business-management features.

In mid-December, Square sellers processed more than $100 million in sales in one day, a first in the company's history. Such numbers equate to Square merchants, as a group, ranking as the 13^th largest retailer in the country in annual sales, the company said.

Those numbers don't include Square's processing volume for the Starbucks coffee chain.

The company also benefits from the celebrity of its CEO, Jack Dorsey, a Twitter founder who has been the very public face of Square over the years — he even inspired a comic book, published by actress Alyssa Milano, based on his technical expertise ("I picture [Dorsey] leaving the office at night and going home, where he locks himself in his room and starts hacking to change the world," Milano said in a press release.)

More than 40 percent of Square's payment volume comes from sellers who handle more than $125,000 in payments a year, up from less than 25 percent in 2012. The company says its fastest growing segment is merchants accepting more than $500,000 in card sales per year.

Square is also enjoying "a tremendous response" from merchants using Square Capital, the small-business financing program launched in 2014, Ury said.

"We have 85 percent of businesses saying they would be extremely likely to recommend the product to a friend," Ury said. "You don't often see that much enthusiasm for a financial product."

Merchants borrowing money through Square Capital pay it back, plus a fee, as a percentage of their monthly sales. There is no set deadline to repay; if a merchant has a slow month of sales, there is no penalty.

Square's other new products include an order-ahead app, an in-store pickup service, an interactive receipt, a person-to-person payment app and an upcoming EMV-chip card reader.

"Square is introducing a lot of new products, but not all of them are revenue-generating products," said Gil Luria, analyst with Los Angeles-based Wedbush Securities. "They have a lot of resources invested in products right now, but that means their growth is going to come at lower and lower margins."

It is difficult to determine whether Square's products are successful and, if they are, whether they will generate significant revenue in 2015, Luria said.

The ideal outcome for Square is to be bought by a larger payments company, Luria added.  "Even though they have grown admirably, their scale is still small compared to any other payments company."

Angela Angelovska-Wilson, a financial services and banking lawyer at Reed Smith LLP, calls the uncertainty about Square's future "the multi-million dollar question."

It would be good news for Square if it were sold to a big payments player like JPMorgan Chase, Angelovska-Wilson added. "Square already works with Chase Paymentech, but it's hard to tell what will happen."

Square has displayed some sensitivity when it comes to speculation or rumors that it is financially-strapped and seeking a buyer. Last summer, the company posted a "Top 10 List" blog to address what it called the various "myths" about the company. On the subject of M&A, Square offered that "we're here for the long term."

Square has registered for money transmitter licenses in all states, which allows the company to land relationships to share its technology with companies like Snapchat for its Snapcash person-to-person payment system, Angelovska-Wilson said. But these moves may not be enough.

"Square has tried to be very creative and find different business lines where they can play," Angelovska-Wilson said. "But payments is a notoriously difficult and low-profit margin business unless you do a huge volume like a MasterCard or Visa."

Square's numbers are advancing, the company said. Square businesses now get more than 1 billion customer visits per year, while Square Register is now available to sellers around the world, supporting 130 currencies.

No matter what else is going on in the marketplace, Square has never wavered from its goal of "make commerce easy," a slogan displayed at the entryway to the company's office in San Francisco, Ury said.

"We knew payments was part of that creed, but not the whole thing," Ury said. "It's great that the merchants can accept credit cards, but what if you want to expand a food truck to a brick-and-mortar café? Square helps with all of that." 

The company is trying to get the correct executives in place to continue its push in the coming year.

Square recently hired Visa chief marketing officer Kevin Burke to lead its customer acquisition initiatives. In addition, Gokul Rajaram will lead engineering and product teams, while Alyssa Henry will oversee the software development aspects of those teams. Square hired Henry away from Amazon last spring.

The executive moves are not unusual for a growing company, Luria said.

"I would expect some level of change," Luria added. "Square is a very attractive place to work and a well-respected company, which is why they are able to attract top talent."