Founded in 2009 by CEO Jack Dorsey, Square Inc's (NYSE:SQ) original purpose was to allow any vendor or merchant with a mobile device to be able to accept card payments "anywhere, anytime". Since then, Square has evolved into a much more robust payments solutions business that believes it is poised to capture market share in this competitive sector going forward.

Source image: Square Inc.

Since its IPO in November 2015, Square has given its shareholders a wild ride, swinging from lows just a shade higher than $8 to highs near $16. While the company has yet to turn a profit on a GAAP-basis, many other metrics show consistent growth across the company's platforms. In Square's 2016 third quarter, the company reported $178 million in adjusted revenue, a 51% increase year over year. The company's gross payment volume (GPV) was $13.2 billion, a 39% increase from the year ago period. 

Square offers basic point of sale (POS), online, and mobile payments solutions to its customers. It also provides more sophisticated services like customizable platforms for merchants; business loans, instant pay features, and even restaurant delivery services. Most of these extra features are listed under Square's software and data product segment, the company's fastest growing revenue category.

The software and data product segment is loaded with extra features that Square's merchants seem to be utilizing, judging by the results. This segment's revenue grew an incredible 140% year over year in its most recently reported quarter. 

Whether Square can continue its current success probably depends on three of the company's fastest growing services found within this category: Instant Deposit, Square Capital, and Caviar. Let's take a closer look at these offerings to determine how bright Square's future might be:

Instant Deposit

This service allows retailers to receive money instantly in their bank accounts upon swiping a customer's credit or debit card. The usual processing time can take up to four days and create cash flow problems for small businesses. In the company's 2016 third quarter shareholder letter, Square stated that since launching this product a little more than a year prior, over 200,000 merchants had already made almost 4 million instant deposits.  For each instant deposit, Square charges 1%. This could be an incredibly lucrative area for Square, as the service amounts to little more than a three-to-four day loan that is virtually guaranteed.

Square Capital

Square Capital is a service Square offers which facilitates loans to its business customers. The merchants can then pay the loan back gradually, as a percentage of transactions. In the third quarter alone, Square processed over 35,000 loans totaling more than $200 million, an approximate 70% year-over-year increase. 

The average loan size, according to CFO Sarah Friar, is about $6,000. These loans especially appeal to small businesses that do not normally have access to capital to cover unexpected expenses or purchase new equipment.

Last year, Forbes contributor Yan Revzin listed "being underfunded" as the second major reason why start-ups fail. Entrepreneurs know that there is almost always a transition time from the day they open for business to when they finally begin to make a profit. This service can help small businesses bridge this gap, making it a lifeline hard to pass up.

Because Square is so intimately familiar with its customers' businesses, it can choose who to offer these loans to with a high amount of discretion. Thus far it's working. Square Capital has maintained a 4% loan loss rate for every single quarter in 2016 thus far. That's less than half the national default rate across all small businesses this year according to WAIN Street's Business Default Index.  


Caviar might seem an odd addition to this list of catalysts for a payments solutions company. After all, a restaurant delivery service that allows customers to order food online and then have it delivered a short time later seems to be well outside of Square's wheelhouse. Similar food delivery services are popping up across the country, quickly making this a fiercely competitive business arena. 


Source image: Caviar

However, Caviar, which Square acquired in August 2014, has quickly grown since coming aboard. While numbers aren't available on Caviar's revenue or profitability, we do know weekly order volume has grown eleven-fold since Caviar's acquisition. 

CEO Jack Dorsey sees Caviar as more than just a bolt-on acquisition: He sees it as another important member in Square's ecosystem. After all, if Square's many restaurant merchants are selling to more customers, this ultimately increases Square's payments volume. It also gives restaurant merchants another service they can use without leaving Square's larger ecosystem. 

Dorsey believes Caviar is a great way to introduce Square's payment solutions to restaurant owners.

This is crucial because restaurant owners are key to Square's future. While stats vary about how many restaurants currently operate in the U.S., what is unquestionably true is that restaurants dominate the small business scene. Traditionally, restaurant start-ups have an incredibly difficult time securing a loan, making Caviar the second attractive service Square offers the restaurant industry (see Square Capital above). This is not a coincidence. Dorsey obviously sees Square's future tied to its ability to secure restaurant customers.  

Giving customers the right tools 

By offering additional services that appeal to its customers, Square should continue to experience explosive revenue growth not often seen in this sector. So investors would be wise to closely watch the software and data product revenue numbers in the quarters ahead to better understand how much growth potential Square ultimately possesses. Square investors will have a lot more to look forward to if these services can continue to drive this segment to new heights.