Hip to be Square (Capital)

Last week Gaucho Chris and I got into a very constructive dialogue on the pros and cons of the Square Capital loan platform where Square lends out money to its business clients. I think we agreed on 99% of everything and together, covered nearly all the aspects of the business loan platform. I’ve tried to put all that together in this article, plus Square’s new platform Square Installments, which is basically a loan platform where Square loans money to its customers’ customers. Not as thrilled about that one, but I’m willing to give it more time.

Square Capital is a loan platform for the company’s vendors. In the second-quarter shareholder letter, management reported Square Capital extended $318 million across 49,000 business loans, a 68% increase year over year. This explosive growth demonstrates that Square has found a small business loan market underserved by banks and other financial institutions. The average loan size about $6,500.

In a recently conducted survey, 84% of respondents claimed they used the money to grow their business. Nearly a third – 32% – said they used the funds to either open a new store or purchase equipment. Almost as many – 31% – said they used the money to purchase inventory. This is important, because as Square’s merchants grow, so does Square. After all, each sale negotiated across Square’s payment processing platform is money in its pocket.

Furthermore, management has found that participation in Square Capital increases the merchant’s engagement across the entire Square ecosystem. Management stated that Square Capital borrowers “often” use other services offered by the company. This not only drives greater revenue per seller but also helps with customer retention, because the more Square services retailers utilize, the less likely they are to leave.

Read the entire article at https://www.fool.com/investing/2017/09/04/incredible-growth-…

Also please let me know if I missed anything. I’m trying to slowly write articles about all the aspects of Square’s business model that I like so much. Here’s what I got so far:

An overview of Square’s subscription and services-based revenue: https://www.fool.com/investing/2016/12/22/3-business-segment…

Square’s culture of innovation (this needs an update on examples, but principle still holds): https://www.fool.com/investing/2017/01/07/3-ways-square-inc-…

Square’s ability to keep its take rate so high: https://www.fool.com/investing/2017/08/13/the-most-impressiv…

More in-depth look at Square Caviar, part of its subscription and services-based revenue segment: https://www.fool.com/investing/2017/07/08/squares-caviar-now…

And, kind of, an overall buy thesis for square which looks at international growth, its culture of innovation, and its take rate: https://www.fool.com/investing/2017/05/26/is-square-inc-a-bu…

I’ve mentioned the effect Square’s services like Caviar and Capital have on making Square’s ecosystem extremely sticky for customers before, but now realize I’ve never devoted an article to it. Hmm…

Anyway, GauchoChris, Bear, etc. Let me know if you think I’m getting anything wrong or missing an obvious point. Would love any feedback.

Matt
Long SQ
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

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Anyway, GauchoChris, Bear, etc. Let me know if you think I’m getting anything wrong or missing an obvious point. Would love any feedback.

Matt,

This list of links to your articles is an incredible resource for anyone interested in Square. Please keep posting here about any future articles you write on the company (maybe just copy the links here each time to keep the resource updated). I certainly don’t think you’re missing anything, and you have often made me aware of things I haven’t previously looked into.

Thanks for the great work. It’s so nice that you write regularly about Square. It’s like having regular updates from Bert or something. Not as lengthy, more bite sized and manageable, but the cumulative effect is maybe even more useful since the articles come more frequently.

I appreciate it,
Bear

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It’s like having regular updates from Bert or something.

That is surely a compliment I don’t deserve, but I’ll take it anyways :slight_smile: Thanks Bear.

Matt

Hey Matt! I will echo the others on the quality of your Square (and other) postings. Good job!

Quick question if you don’t mind answering: What percentage of your portfolio is in Square?

Just curious.

Take care.

Jeb
Long SQ
Explorer Supernaut
You can see all my holdings here: http://my.fool.com/profile/TMFJebbo/info.aspx

Jeb,

Right about 2.5%. In the payments space I have more dedicated to Mastercard (7.3%) and PayPal (8.1%). But I like Square and hope to add more in the future, especially if there’s ever a good dip.

Matt
Long MA, PYPL, SQ
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx