Digital payments are still a booming business around the world, and Square, Inc. (NYSE:SQ) and American Express (NYSE:AXP) play key roles in building the platforms customers use. But they are coming into the market from very different angles.
American Express is one of the oldest credit card companies, making money on transactions and providing credit to customers as traditional banks do. Square is processing cards like American Express and taking a small fee in the process. But it's building a platform of products small businesses can use to build and grow, with payment processing at the center of the offering. So which one is the better investment today?
Where financials stand today
American Express is a highly profitable company, but it isn't really a growth company. Its market for credit cards and other services, mostly on the high end of the market, hasn't grown as quickly as digital payments overall, as you can see from the comparison to Visa (NYSE:V) and Mastercard's (NYSE:MA) revenue and net income growth over the last decade.
Square, on the other hand, is a high growth company, but has yet to reach profitability. The chart below also shows just how new the company is to public markets, giving investors only a couple of years to analyze its financial performance.
Square is clearly the growth company out of these two, but there's more to their differences than that. Square's business is trying to build a platform for other businesses to build on top of.
Transactions versus a platform
American Express' business is very well established at this point and it's not going to change a lot in the future. And despite how big the company is, it's really second fiddle in credit cards to Visa and Mastercard globally.
Square is a credit card processor, but it's more of a platform company. It wants small businesses to use its product to process credit cards and also plug into accounting, payroll, inventory, and other systems it may have. The company's point of sale system is also, arguably, one of the easiest to use on the market, making it an easy draw for small businesses trying to set up quickly.
Long-term, the platform approach may engrain Square more deeply with its customers. It's difficult to change systems once a business starts using them, so Square is becoming indispensable for a lot of its partners.
Innovating for the future
Square could also be disrupting commerce in ways we don't fully understand yet. The Square Cash app makes peer to peer payments easier, and it could eventually allow Square customers and partners to use Square payments without ever using a traditional bank or credit card. If adoption of Square's payment processors and the Cash app grow, there are a number of ways it could leverage that side of the platform.
American Express seems to be moving in the opposite direction, focusing on core markets but not expanding into interesting new markets. It has a huge profit advantage over Square today, but that lack of innovation could be a detriment long-term.
The platform play in digital payments
Right now, I think Square is the better buy for investors long-term, mainly because it's disrupting the payments business rather than being disrupted like American Express is. It's very possible that American Express remains highly profitable for years to come and stays one of the largest credit card companies, but I think Square is the wave of the future, and it's the kind of company I want in my portfolio going forward.