Square (NYSE:SQ) introduced the Square Card, a business debit card, back in January. The debit card is linked to cardholders' merchant accounts and offers a 2.75% rebate on purchases made with other Square merchants.
The Square Card follows in the footsteps of Square's Cash Card, which enables Cash App users to access the funds in their account immediately. Cash Card has been a meaningful contributor to Square's subscription and services revenue growth. Square Card could be an even bigger contributor, bringing in $100 million in annual revenue by 2022, according to analyst Josh Beck.
Here's why Square Card could generate a significant amount of revenue for Square in a short time, and why that's just part of the benefits of Square's latest product.
Servicing the underbanked
Square Card meets an important need that impacts a lot of Square's merchants. Beck said roughly 40% of small businesses don't have a business bankcard. The Square Card fills that need, enabling merchants to keep business expenses separate from their personal expenses more easily.
Square has developed a big business around providing services traditionally provided by banks to its users. Square Capital offers loans to merchants that banks would overlook. And Cash App is taking on a life as more of a consumer banking app than a peer-to-peer payments app.
Square's existing relationship with its merchants gives it a simple go-to-market strategy, where it can tell merchants about the Square Card right in their sales dashboards. The unique 2.75% cash back at other Square merchants also produces a word-of-mouth marketing effect, where merchants and vendors are likely to talk about the card to other Square merchants.
Square's unique capabilities of finding and serving the underserved market will enable it to grow the number of Square Card users rapidly. Beck expects cardholders to spend $100 billion on Square Cards in 2022, resulting in $100 million in revenue for Square.
Developing a network effect
Beyond the direct benefits of merchants spending money on the Square Card, Square could realize additional benefits from the potential network effect created by its cash back perk. Since merchants are rewarded for using the Square Card with other Square merchants, they're incentivized to choose them over merchants or vendors that don't use Square. And if a business spends a lot of money at a merchant or vendor, it may be able to sway them to switch to Square's payment processing.
Square is taking a behavior its merchants already exhibit -- spreading Square by word of mouth -- and incentivizing it by offering cash back on the Square Card.
Creating a network of merchants promoting its core payment processing service gives Square a wider moat to protect it from the competition. Square has started developing a moat by creating an ecosystem of services primarily monetized through payment processing. Those services enable it to compete on price for larger merchants and convenience for smaller merchants.
Square Card is another part of the ecosystem, but it also produces a network effect to reinforce Square's moat. So, not only will Square Card produce a good amount of revenue for Square, bolstering subscription and services revenue to an estimated $1.43 billion next year (up from $592 million last year), according to Beck, it also supports the overall growth of Square's core business.