Over the last few years, Square's (SQ 0.51%) portfolio of products has evolved into two vibrant ecosystems: one focused on sellers and another focused on consumers. And the company plans to keep investing heavily in both, adding new services to increase utility and drive user engagement.
So far, this strategy is working and both of Square's business segments are gaining momentum. Here's what investors should know.
Square empowers sellers
Square's seller ecosystem consists of various hardware and software solutions designed to empower merchants, and the ecosystem has expanded rapidly in recent years.
Image source: Square.
In 2019, the company launched Square Online, which allows sellers to easily build a digital storefront that syncs with their in-store inventory (or menu) and point-of-sale system, enabling merchants to manage their physical and online presence from one dashboard. In 2020, as the pandemic forced stores to close, Square Online helped merchants stay in business. In fact, gross payment volume (GPV) from online channels jumped over 50% in the second and third quarters of fiscal 2020, and online payment volume accounted for 25% of all GPV, a significant increase from 14% in the same quarter the prior year.
Additionally, Square recently launched Online Checkout, a solution that helps clients rapidly shift to e-commerce without building a full digital storefront. Online Checkout allows sellers to easily add a checkout link to emails, blogs, or social media, giving them a digital presence immediately.
Likewise, Square Capital, the company's lending service, facilitated $873 million in PPP (Paycheck Protection Program) loans in the first nine months of fiscal 2020. This was another lifeline for sellers, helping them keep employees on payroll and weather the devastating impacts of the coronavirus pandemic.
Finally, Square enables sellers and their employees to instantly access the cash they earn. For example, the Square Card is a business debit card that allows merchants to immediately spend funds in their Square account (i.e., money earned through their business). Likewise, Square Payroll enables employers to give employees instant access to wages. This service is especially valuable right now, as the coronavirus has left many individuals in a difficult financial situation.
Image source: Square.
Tying all of this together, Square's expanding seller ecosystem -- from specialized point-of-sale software to digital commerce solutions -- goes beyond simply enabling merchants to accept digital payments. Increasingly, Square offers end-to-end solutions that allow sellers to manage and grow all aspects of their business. This has supercharged engagement and made sellers more dependent on Square, strengthening the company's competitive advantage by increasing switching costs.
Square supports consumers
Square's Cash App ecosystem is designed to provide consumers with financial tools that help them manage money. For instance, mobile app users can fund peer-to-peer (P2P) transfers, receive direct deposits, buy and sell Bitcoin and stocks, and make payments using the Cash App.
In the third quarter of fiscal 2020, Cash App Business GPV (the total dollar amount sent to Cash App business accounts and P2P transfers funded with a credit card) jumped 332% year over year and accounted for 9% of total GPV, a significant increase from 2% in the same quarter the prior year.
Likewise, Bitcoin revenue jumped 731% in the first nine months of fiscal 2020. Despite this incredible growth, investors should note that Bitcoin is associated with a very low gross margin -- roughly 2% in most recent quarter. Even so, the Cash App still raked in $849 million in gross profit, a 271% increase compared to the prior year.
This strong growth is evidence that Square's Cash App ecosystem is effectively engaging consumers. In fact, in the most recent quarter, the number of daily active Cash App users nearly doubled compared to the prior year. This was driven by increased adoption across the entire ecosystem, including direct deposits, investments in stocks and Bitcoin, and purchases made with the Cash Card (a debit card that allows users to spend their Cash App balance). All of these trends bode well for Square, and as the company continues to grow its portfolio of consumer-facing products, Square should become even more essential.
A final word
Investors should be aware that Square has significant exposure to brick-and-mortar retailers, though the company's efforts to increase online GPV have paid off. As a result, any future business closures would be problematic for the company.
However, it's no secret that engaged consumers tend to generate more revenue, and Square is doing an excellent job of engaging both sellers and Cash App users. As a result, both ecosystems have gained momentum despite the pandemic, and that should translate into strong growth and shareholder rewards in the coming years.
