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Why Is Square Stock up Over 25% This Year?

By Andrew Almeida – Updated Feb 13, 2020 at 9:26AM

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Investors see the power in an innovative network

Square (SQ 11.89%) is off to a meteoric rise in 2020 leading up to their earnings call at the end of this month. If you follow Square you have seen these rises before, only to be followed by equivalent declines as the company is yet to post positive earnings and any news good or bad will magnify the stocks share price. However, this time could be different as Square's recent patent approvals point toward innovation that puts a more complete picture around CEO Jack Dorsey's plans. Advances in system memory, multisource processing, and even cryptocurrency will allow for the next generation of use cases to be pushed through Square's existing network.

The benefits of network effects are closely followed by investors as a powerful force that allows companies to push products to scale quickly. Think about how Facebook ads can immediately be pushed out to a network of over 2 billion people. And while Square's network isn't as sizable, they continue to build out new integrations and even innovate new uses to deepen the loyalty of platform users and attract new customers.

Customer using Square terminal

Image Source: Getty Images

What's Ahead?

Square's recent patent approval for multisource transaction processing is a leap forward in the consumer payment experience. As mobile payment adoption continues to accelerate, multisource processing could help Square solidify its position as the point of sale (POS) system of the future for merchants. This technology will allow standard payment protocols and non-standard protocols to communicate simultaneously when transactions are being made. What does this mean? In short, smart terminals working on behalf of business owners and consumers.

When a transaction is being made payment terminals will be able to communicate with background applications, other payment cards, loyalty cards, biometric linked accounts, and a variety of other accounts. In some instances, when communicating with mobile phones as a payment device, messages can be pushed to the customer. This can include a notification that using another form payment method will offer better rewards or discounts allowing customers to identify savings in real-time. Or in other instances apply loyalty points or coupons which you have been earned through other applications. Conversely, merchants can offer loyalty programs, promotions, or other third party offers at the point of sale.

System Scanning with Direct Access to Memory

As the breadth of financial data moving across networks grows, small and medium-sized businesses are increasingly becoming targets. Cyber threats can be aimed directly at a payment terminal to access payment and personal information. Fighting off fraud has become increasingly difficult as well as the number of payment types stretches across magnetic stripe cards, chip cards, tap cards, and mobile wallets. Square's technology will help reduce these risks for the small business owner.

Big picture the technology will allow for scanning of the payment terminal's general memory to determine if it is secure. It can then communicate with a payment server whether it is secure, or be rejected by the payment server if the server has determined the terminal to be insecure from the information transmitted. Under these circumstances, the technology could either deny a fraudulent transaction or provide measures for securing the terminal. From what it looks like the technology will be a separate add-on that can be attached to terminals so it should serve as another revenue source for Square.

Cryptocurrency Payment Network

Square's decision to invest in crypto could be game-changing. It may be hard to see why Square chose to be in the Bitcoin business given its high volatility and low margins. Gaining legitimacy and broad-based adoption has been a challenge for bitcoin. The Crypto Currency Payment Network has the potential to change that. Here's how...

The payment network would exchange fiat currency for non-fiat currencies in real-time when transactions are made. So, a customer could shop for your products and pay in bitcoin, while the business owner will receive funds in dollars (or currency they operate in). This solves a major problem of coin adoption because it has made no sense for individual merchants to receive or hold bitcoin.

When looking through the lens of building out a network, Square has built a bridge to connect two networks. First, he invited bitcoin users to the platform who are not welcome by his competitors. And now, through the Crypto Currency Payment Network, merchants will be able to transact with customers who want to pay in Bitcoin. Not only will Square be bringing potential new revenue streams to its users, but they will also be processing and increased number of transactions-where Square earns higher margins.

There is no doubt Square understands the power of building out networks. In the same way Twitter carved out a social niche from Facebook, Square continues to innovate and carve out their corner of the fast-growing digital payment industry.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Andrew Almeida has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Square and recommends the following options: short March 2020 $70 puts on Square. The Motley Fool has a disclosure policy.

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