Square (NYSE:SQ) has been one of the market's best recent performers this year. With a stock that has more than doubled in 2018 alone, the payment processor is finally hitting the radar of many individual investors.

But the payments space is also lined with several big-name competitors. PayPal (NASDAQ:PYPL), Apple Pay (NASDAQ:AAPL), and Samsung Pay are each expanding rapidly and competing for the right to facilitate your mobile and digital commercial transactions. If you expand the lens internationally, global players like Alibaba's (NYSE:BABA) AliPay and Tencent's (OTC:TCEHY) WePay also join the mix; and each of these China-based companies operates through a significantly lower-cost financial infrastructure.

With more than 2 billion commercial transactions taking place every year, payments is an absolutely huge market. And it could very well turn out to be a winner-take-all or winner-take-most outcome.

The stakes are high, but lesser-known Square is hitting above its weight class and quickly establishing itself as one of the most prominent players in the space.

Let's take a closer look at why that is.

A photo of Square's point-of-sale terminal

Image Source: Square

Sizing up Square

Like most other payment processors, Square's initial focus was on facilitating payments. Its point-of-sale (POS) terminals attach directly to mobile devices, so small businesses can collect credit card payments at any location. The transactions are stored in a customer's profile, and Square is developing industry-specific support software to help provide data analysis to make sense of the transactions. Transactions used to account for 90% of Square's total revenue, but they're now closer to 60 to 70%, as the company has expanded its revenue streams by providing additional solutions to existing customers.

Square also recently acquired Weebly, which makes it easy for small businesses to set up shop online. Weebly provides the tools for companies to create e-commerce sites, which Square can further make sense of.

But the analysis doesn't stop there. In addition to providing analytics for its customers to better understand their businesses, Square Capital is using transactional analytics as the data points to make loans. Square has already "acquired" customers with the POS terminals, so the natural next step was to evaluate their transactions in order to underwrite loans.

This is vastly different than traditional banks -- which typically rely on third-party vendors like Fair Isaac (NYSE:FICO) to provide a FICO credit score to assess creditworthiness. By having a pre-existing relationship with customers, Square can reduce its risk profile and get better visibility into a company's operations. As an added bonus, Square ties the repayment of the loan into micro-fees that accompany each of its future transactions.

This direct relationship with customers could also prove to be a huge opportunity for Square to serve the underbanked. Several companies, especially in rural areas or in developing nations, don't yet have an established credit history. This puts them off the radar of traditional lenders.

Square's analytics give it a way to independently evaluate these companies, which could unlock a significantly large book of new loans and of corresponding profits.

Hitting all the right angles

Square founder Jack Dorsey is a strategic leader who has created a disruptive business model that is generating excellent returns for shareholders. But even so, he is also open-minded and visionary, willing to adjust Square's business model if changing market conditions deem it necessary. 

Investors should take note of the direction Square is heading. We'll watch for growth in its customer count, as well as any upcoming mergers and acquisitions.