A need for speed
Speed really matters to our customers, whether it's the fact that our contactless and chip reader is getting down into seconds to take the transaction. Whether it was next-day settlement and then instant deposit. We know it really matters to small businesses to have fast access to working capital. When they have fast access, they can keep reinvesting in their business and make their business grow.
-- CFO Sarah Friar
Speed may be Square's most powerful competitive advantage. By enabling ultrafast payment transactions and instant deposits, it helps its customers easily accept credit cards and quickly gain access to those funds. Thus, Square has positioned itself as a valuable partner when it comes to cash flow management -- a key challenge for many small businesses. In turn, it's enjoying surging growth for its services, with instant deposit volume doubling, to $4 billion, in less than a year.
Automation is allowing Square to scale rapidly
[M]oving money quickly in and of itself isn't the difficult thing. It's hard to do, but we've done it. But risk is really where the rubber hits the road. You really have to be doing real-time automated risk management if you're going to get into the business of instantly depositing out to sellers and to individuals. We were born in that era, so our risk from the get go was built with, at the time we said software algorithms, today what people would call machine learning.
Incredibly, 99.95% of Square's transactions are automated. This allows them to be processed without needing to be evaluated by a human being from a risk management perspective. Square sees its ability to manage risk in a "hyper-automated" manner as an important point of differentiation from its competitors. Time will tell whether these automated solutions work as well from a loss perspective, but for now, they're helping Square rapidly expand its operations.
A powerful ecosystem
[I]n a lot of these products like an instant deposit, where we've already acquired the customer, there's not a lot of incremental cost when we add on a new product like this. That is the beauty of the ecosystem. That once we have a customer in place, we know that the more they use a second product or a third product from Square, the more sticky they are and it is less expensive for us, typically, to be able to both upsell that product, but then be able to support that product over the long run. I think we gave a nice data point last quarter that of our larger sellers, more than 50% of them take a second product from Square.
This statement helps to explain the power of Square's ecosystem-based business model. Each new service Square introduces reinforces the others. And once Square acquires a new customer, it's typically able to cross-sell additional services to that business. Moreover, each additional service used makes it less likely that business will leave Square's ecosystem, thereby increasing the lifetime value of that customer and the network as a whole.
A big push into restaurants
We're excited about the launch of Square for Restaurants, our newest industry-specific point of sale, and our first for larger, full-service restaurants. With this product, restaurants can more easily manage operations so that servers can spend more time delighting diners.
-- CEO Jack Dorsey
Square sees a massive opportunity in providing industry-focused solutions to the more than 300,000 restaurants in the U.S. alone. Its Square for Restaurants platform combines hardware, software, and payments services that help restaurants streamline their operations. It also offers the option of integrating with Square's fast-growing Caviar delivery and pickup service. As the only company that provides point-of-sale hardware and software with food pickup and delivery, Square is rapidly gaining share; Caviar revenue more than doubled year over year in the second quarter.
Invest more now, profit more later
So, everything we look at says keep investing. The more we grow the ecosystem, the more we bring Square sellers onto the platform and now consumers onto the platform, the more opportunity we have down the line to continue to cross-sell and upsell into that space. So, we think that is the right stance to take.
With such a massive market opportunity before it, Square is making the smart decision to invest aggressively to expand its operations. It enjoys significant competitive advantages, but legitimate competition does exist, so establishing an early lead is of the utmost importance.
Additionally, Square often sees a rather quick payback period for its investments in areas like sales and marketing, with each dollar it spends to bring a new customer into its ecosystem typically more than paying for itself within a year's time. Therefore, investors should welcome Square's growth investments, as the capital this emerging payments leader spends today is likely to produce far larger profits in the years ahead.
Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square. The Motley Fool has the following options: short September 2018 $80 calls on Square. The Motley Fool has a disclosure policy.