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Everyone Thinks Square Is Just a Payments Company -- That's a Big Mistake

By Adam Levy - Updated Apr 24, 2018 at 4:04PM

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Processing payments is just a way to get to what Square really wants.

I know what you think.

This is going to be an article about how Square (SQ 8.52%) is building out a broad ecosystem of merchant services. About how the products it has brought to market since 2014 -- like Square Capital and Instant Deposit, among others -- accounted for 36% of the company's adjusted revenue in the fourth quarter last year. About how each new product one of Square's merchants' takes pulls it deeper into the ecosystem Square is building.

While it's true that those new products -- mostly Square's subscription and services products -- are an important part of Square's business, that's not what this article is about.

Square isn't just a payments company. And it's not just a broader merchant services company.

Square is a data company.

A person using Apple Pay at a Square Register.

Image source: Square.

Square has some of the most valuable data in the world

Google would love to get its hands on Square's data. (Keep that in mind.)

Square has data on how consumers spend their money at a wide variety of retailers. It has data on how retailers order inventory. It has data on how merchants pay their employees, and how those employees spend that money. It has data on when stores are busy and when they're not. It has data on what questions its customers need answers too. And much, much more.

Square currently uses its data for a few things around its core merchant services:

  • Risk management and fraud detection
  • Machine-assisted customer support
  • Assessing risk for Square Capital loans
  • Cross-selling Square's other services to existing customers
  • Finding new merchants to target with direct marketing

Square's data is an essential tool to running its business efficiently. Square's data could also be used to assist with developing new products.

But none of this really makes it a data company; it's really just a merchant services company that uses its data effectively.

Building customer profiles

What makes Square a data company is that it's focused on building profiles of its customers -- both merchants and consumers.

In a February interview, Square CFO Sarah Friar noted that the most exciting thing about the rapid growth of Square's Cash App is "this new look into a consumer's profile." Cash App is a peer-to-peer payments service that Square added several new features to last year, including a prepaid debit card and the ability to buy bitcoin. Despite 7 million users, Square doesn't produce much revenue from the app.

Just like Facebook (FB 1.83%) and Alphabet's (GOOG 4.16%) (GOOGL 4.20%) Google, Square is building profiles on its users. And the data it's collecting is extremely valuable: how people use their money. Google and Facebook can only guess at how its users are spending their money; Square has hard data.

Combined with a network of small merchants

What makes Square's data even more valuable is that it also has a network of small businesses all looking to get in front of customers. That means Square could be only a few steps away from building an advertising platform for its merchants with highly targeted ads.

Not only that, but Square is uniquely positioned to track the effectiveness of those advertisements from ad impression all the way to completed purchase based on its unique position of having touch points with both the consumer's and the merchant's financial data. Square could even offer merchants the opportunity to only pay for advertisements as they convert by taking the cost out of each card swipe, like it does with Square Capital. Google and Facebook can't compete with that.

With tens of billions of dollars spent on advertising in the United States alone, that's an even bigger opportunity than the $26 billion addressable market Friar pointed to at Square's investment day last year. Google brought in over $95 billion global ad revenue last year. Facebook brought in almost $40 billion. Square generated less than $1 billion in total adjusted revenue.

A marketing product would also give Square merchants another reason to stay with Square instead of opting for its competitors with no consumer-facing products.

Granted Square hasn't even hinted at the possibility of a marketing product for its merchants. And this is just one example of how it could monetize its data. But as its consumer apps like Caviar and Cash App grow, Square's best path toward monetizing those platforms may be leveraging the data for some sort of marketing product.

Building out consumer profiles and merchant profiles and matching them with each other is a major opportunity for Square, and that's what makes it more than just a payments company.

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