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Square's Banking Potential Could Be the Real Long-Term Growth Driver

By Motley Fool Staff – Sep 27, 2018 at 10:11AM

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Square is becoming a lot more than a payment-processing company.

Square's (SQ 0.23%) Cash App is wildly popular, but isn't really making any money -- yet. In a recent interview, CFO Sarah Friar discussed Square's long-term banking ambitions. To put it mildly, any banking, brokerage, or lending traction the company gains with its millions of Cash App users could be a big profit driver in the future.

In this segment from Industry Focus: Financials, host Jason Moser and contributor Matt Frankel, CFP, discuss Square's banking potential.

A full transcript follows the video.

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This video was recorded on Sept. 24, 2018.

Jason Moser: We talk a lot about Square. Square's a company we like a lot. We're both invested in it. Based on what I saw on Twitter last week, it sounds you've done even better on your Square investment than I have, which is just terrific. I think you said you were up about 800% or something at this point?

Matt Frankel: Yeah. I got in when they were trading at about $11.

Moser: Strong!

Frankel: At the time, I didn't see it for what it was. I just noticed the little Square readers popping up everywhere around town and said, "Hey, there's a future in that."

Moser: I think it's very difficult when you see these types of companies to see how far they can go based on what they are at that current small little start-up status. I think for the most part, Square is seen as a payments company, and rightly so. But this interview with CFO Sarah Friar is from a Recode conference a couple of weeks back. We'll tweet the link out to that interview on the Industry Focus Twitter feed.

Matt, you published an article a few days back on called The Biggest Reasons Square's Stock Could Keep Climbing. It centers around what I think is a bit of a serendipitous product offering for the company that is really starting to pay off, right?

Frankel: Yeah, the Square Cash app. Square Cash just recently surpassed Venmo in terms of total downloads. It's become a very, very popular app. The thing that people need to know is, Square doesn't really make money on it. They have about seven million active users. They're using incentives to get people to use their platform more. They're using an offers bonus program that Square is footing the bill for. They're actually probably losing money on Square Cash right now. But the long-term potential of that is what those customers could be used for. This is where the banking part comes in. Sarah Friar, the CFO, just recently said that anything you can do with a bank, you'll eventually be able to do with the Square Cash app.

The big thing that people have speculated is Square's going to start doing personal loans to cash customers. That would be a very natural transition. They already do business loans through Square Capital. They've already made their intention clear on applying for a banking license. That could be a very natural progression. Things like savings and checking accounts, high yield CDs, even a brokerage platform, are all things that are possible. They have seven million active users, more than 33 million downloads in their ecosystem that they could leverage.

She said that one of the reasons that they feel this way is because people are actually leaving pretty large balances in their Square Cash accounts. They want to help these people put that money to work, use it to their advantage, invest for their future, be able to loan them money if they need to.

Just to put that in perspective, Square has about two million business customers, which is what they're generally known for. They have more than 3.5X the amount of active customers in the Cash app. When we say that they've barely begun to unlock the potential of their business, that's where that comes from. This is millions and millions of people. Even if they got the same adoption rate as square Capital's business loans, this could be a big revenue driver for the company that can make the payment processing business look like small potatoes at some point.

I've said that Square could easily grow into the size of PayPal or beyond, which would be huge compared to its current price. I think that Square Cash is the future of the company, hands down.

Moser: I think you're right in that comparison to PayPal. If you look at the gross purchase volume that goes through both networks today, Square is still essentially a fraction of PayPal's, yet they're both really tackling that same market, and clearly they're both leading the way. Plenty of room for them to grow. The quote that she mentioned on the call there on that interview that really stood out to me is when she said, "Commerce is a continuum." I think that speaks to, essentially, what you were just talking about there. Square's much more than just a payments company. They're looking to be a part of the consumer's experience from start to finish. The encouraging thing there is that they're using a lot of data to make a lot of really good decisions. I think a lot of great things probably still to come out from this company.

Jason Moser owns shares of PYPL, Square, and TWTR. Matthew Frankel, CFP owns shares of Square and has the following options: short December 2018 $90 calls on Square. The Motley Fool owns shares of and recommends PYPL, Square, and TWTR. The Motley Fool has the following options: short January 2019 $80 calls on Square. The Motley Fool has a disclosure policy.

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