PayPal Holdings (PYPL 1.62%) and Square (SQ 1.19%) are often compared as investments because they're both fintech companies with payment processing platforms. As the world shifts more and more toward using digital payment and wallet options, it can make some sense to view those companies through the lens of their similarities.
That said, these two companies see their places in the fintech universe differently. PayPal is building fintech solutions for businesses and consumers, while Square is building an entire ecosystem to disrupt payments as we know them. For investors, it can pay to really dive into each.
Image source: Square.
The evolving world of fintech
There are more than a dozen companies offering fintech solutions to consumers and businesses worldwide, and each has a little bit of a different take on the industry. Stripe, which is still private, is a leader in back-end payment solutions for online sales, subscriptions, and other digital solutions. Robinhood Markets has become a powerhouse in investment trading and cryptocurrencies. Lemonade is making a name for itself by attempting to bring insurance into the digital and mobile eras. There are many others in many segments of the market, and they all have different approaches to their products and ecosystems.
PayPal has become a major payment solution for online businesses and peer-to-peer transactions. To distill its primary business into one sentence: PayPal is a payment solutions company. Take it straight from its own business website, where the company writes, "We connect you with the solutions designed for how you sell."
Square offers many of the same solutions as PayPal, but I see Square as more of a business solutions company. It offers payment solutions, but it also has back-end tools for running a business, like scheduling, payroll, marketing, loans, and more. A small business can literally be built on top of Square's platform, and its proprietor would have little to no need to find fintech services outside its ecosystem. I think that makes it a more attractive choice for new businesses and a stickier service provider for the long term.
The same can be said for the consumer apps that PayPal and Square offer. PayPal is offering a number of services through the PayPal app for consumers and Venmo. But those two solutions are something less than a unified ecosystem that could be a users' go-to financial services app.
Square, on the other hand, is taking the same approach to its consumer solutions as it does to its services for businesses -- trying to make the Cash App a platform that can sit at the center of a user's financial life. It takes direct deposits, allows a user to pay for goods with the Cash App Card, and has stock and cryptocurrency investing features. I think Cash App will ultimately replace traditional bank accounts for some of its users.
The strategy differences between the two companies are fairly clear: PayPal is focusing on solutions for the broadest number of users possible, while Square is trying to deepen its relationship with customers by offering a full fintech platform solution. This will be important as we look at their recent product additions and how the companies are performing financially.
Where BNPL fits in
The companies' buy now, pay later (BNPL) products illustrate the differences in how they see the fintech market. PayPal built its own BNPL product and is rolling it out within its ecosystem. Square decided to spend $29 billion to acquire Afterpay, an Australian company that's a leader in BNPL.
PayPal is adding another service to a growing suite of solutions for businesses and consumers. It sees BNPL as a bolt-on solution it can add to other solutions.
Square's justification for buying Afterpay was largely to further tie together its Square App seller platform and its Cash App consumer platform. It shouldn't be a surprise that Square announced Cash App users will be able to use the app to pay for both Afterpay purchases and checking out at Square terminals. Square is trying to build two platforms that can live on their own, but eventually integrate seamlessly together.
In short, PayPal is adding BNPL as a solution, while Square is using it to advance its platforms.
Financials matter
The charts below illustrate the market cap, revenue, and gross profit performance of these two companies over the last five years. Notice that PayPal is bigger and more profitable, but that Square is growing more quickly.
PYPL Market Cap data by YCharts
Now consider this chart showing their percentage changes in revenue and gross profits. It's necessary to take Square's revenue growth with a grain of salt because Bitcoin has accounted for a large amount of that over the last two years, but that's why I've included the gross profit metric, too.
PYPL Revenue (TTM) data by YCharts
Square is smaller, but it's also growing more quickly. What's also notable is how quickly the company is growing its profitability. Long term, I would argue that Square's platform strategy could be the biggest disruption in fintech.
Disruption
One criticism I see commonly made regarding Square is that it's largely a U.S. company, while PayPal is international. And that's true.
Where I push back against that critique is that I see Square building a full ecosystem that it could easily export around the world later. And if you think about how the Square App and Cash App are beginning to interact with each other, it will become obvious that full ecosystem solutions will be necessary for fintechs to complete the disruption of the established financial networks.
Right now, most transactions on PayPal products require the participation of at least one outside institution. Usually, those are credit card networks like Visa or Mastercard, which charge fees and work with banks to complete transactions. PayPal is a fintech product company working on top of this long-established infrastructure.
Square transactions are similar today, but it has launched the ability to pay for transactions with the Cash App, bypassing the traditional financial networks. This is where having the complete platform could allow Square to cut out the traditional middlemen in the finance industry. If Square is successful, it could tremendously disrupt the financial services industry.
Square's success will be determined by how quickly it can convert consumers to the Cash App and get them paying with their digital wallets. With 40 million monthly transacting active customers in June -- four times as many as there were a year prior -- this is a booming business in those countries where it operates.
PayPal and Square are playing very different games
Comparing PayPal and Square isn't entirely fair to either company. PayPal is an established and profitable name in online transactions around the world and will likely be a brand we see for many years to come.
Square is smaller and operates in fewer countries, but it's trying to build an entire ecosystem for businesses and another for consumers, effectively creating alternatives to traditional banking and credit cards. If it reaches critical mass, it could impact the financial services industry around the world.
I see PayPal as a much safer company to invest in because it's growing steadily and adding services around the world that will boost its profitability. Square, though, is a potentially disruptive company that could be the future of digital banking.
So when you see comparisons of these two companies, keep in mind that their ambitions are very different, for better or worse.
