1 Reason Square's Core Payment Processing Business Still Has Room to Grow

Square has a lot of new growth avenues, but its core business still has lots of upside potential.

Matthew Frankel, CFP
Matthew Frankel, CFP
Mar 9, 2019 at 8:23AM
Financials

There are several growth catalysts that could propel Square's (NYSE:SQ) revenue higher in the coming years. The company's business lending platform, Square Capital, still has a relatively small market share, and I've written several times about the massive potential of the Cash App. Plus, Square's service businesses are growing at an annualized rate of well over 100%.

With so many avenues for growth, it's easy to forget about Square's core business of producing payment processing solutions designed for businesses of all sizes.

Over the past few years, Square's payment processing volume has grown rapidly. In 2018, the company's gross payment volume grew to $85 billion and represented 28% year-over-year growth in the fourth quarter. Although this is a massive number, it's still a small fraction of the total card payment volume in the U.S. For context, the entire amount of payment volume running through Square's hardware each year is just over half of the total annual revenue of Costco. So there could still be a lot of room for growth that is being overshadowed (and understandably so) by some of Square's newer and faster-growing businesses.

Check out the latest earnings call transcript for Square.

Square Register payment terminal on a countertop in dim light

Square Register stand-alone payment terminal. Image source: Square.

Square's seller mix

Historically speaking, Square has focused on small businesses. The company made its name by making it easier than ever before for small merchants to accept card payments.

Over the past few years, however, the company has gradually started to expand its hardware offerings to accommodate larger sellers' needs. I recently had a chance to experience a demonstration of Square's latest point-of-sale (POS) terminals at the ShopTalk conference in Las Vegas, and I can confirm firsthand that the company has come a long way since pioneering those little card readers sticking out of smartphones.

Square's hardware development efforts are paying off. Over the past two years, the percentage of the company's gross payment volume (GPV) that comes from sellers with more than $500,000 in annual sales has gone from 16% to 24%.

Some of the businesses that use Square's payment-processing solutions include Shake Shack, Eventbrite, and Ben & Jerry's, just to name a few.

Even so, this is still a largely untapped market. Twenty-four percent of Square's 2018 payment volume translates to about $20.3 billion. Meanwhile, the entire card payment volume in the U.S. is nearly $7 trillion, and it's fair to assume that larger sellers account for the bulk of it.

The value Square offers larger sellers

Square doesn't just have attractive and user-friendly hardware. That's certainly part of the appeal, but it also simplifies payments for businesses and as a result, offers significant savings.

Specifically, Square handles parts of the payments process that sellers typically have to handle on their own. For example, Square handles representation in cases of disputes and chargebacks on behalf of its customers, and also has in-house fraud detection experts. Additionally, Square handles PCI compliance for its sellers so they don't have to.

An example the company uses in its recent sales brochure is an actual Square seller with $150 million in annual sales. Between the cost savings from employee time related to disputes, compliance, and more, as well as savings on refund, processing, and chargeback fees, Square estimates that it saves this particular seller more than $230,000 per year as opposed to more traditional payment processing methods.

Tremendous room for growth

Square's large-seller solutions are still a relatively small business, but there's massive potential for growth here. As the company's hardware solutions continue to evolve, more and more large sellers should begin to take advantage of Square's solutions and the cost savings that it offers. In short, Square's roughly $85 billion in annualized payment processing volume could be just a fraction of the company's long-term potential.