Apologies for taking so long to get to this…
• One of the more interesting themes from this year’s conference call, was CEO Jack Dorsey’s comments on automation and how it was contributing towards a material advantage in almost everything Square did - from approving businesses for loans to driving Square’s marketing programs:
Automation has always been a core differentiator for us. We’ve used machine learning and data science to manage risk since the beginning of Square. We’re constantly looking for ways to make our services more automated and more self-serve and machine learning is perfect for that. This focus has allowed us to achieve several objectives.
First, automation allows us to give more people access to the financial system. More than 90% of sellers are automatically approved and self-onboard to process payments, and we’re able to onboard individuals to Square Cash with just a zip code and an e-mail address or phone number. We’ve extended this approach to risk management in Square Capital to provide financing to the underserved.
Second, automation helps us scale as we grow. For example, we currently automate risk assessment for more than 99.95% of transactions. We’re also able to make improvements to our manual handling; our fraud models have already allowed us to resolve 40% more cases every week, compared to beginning of the year.
And third, automation allows us to help our sellers grow. You can see this in our unique suite of CRM tools. We leverage our deep understanding of the customer to build marketing and loyalty programs that are easy to use, measurable and effective. Our loyalty programs are tracked and managed by Square point-of-sale and our technology automatically recommends programs optimized for the seller’s particular business.
• I personally thought the biggest positive from the quarter was that Square was able to keep its take rate largely consistent at 2.94% despite much higher payment volume and a higher ratio of big businesses in the clients it serves. I explain why this number is so impressive in this article:
Over time, Square has found itself with larger clients for its payment processing services. In 2015’s second quarter, the percentage of Square’s GPV coming from large businesses (as defined by those with GPV greater than $500,000) was 11%. In this year’s second quarter, that number had jumped to 19%. Over the same time period, the payment volume coming from small businesses (those with GPV of less than $125,000) had dropped from 63% to 54%.
There are plenty of positive reasons for Square to pursue these businesses. After all, larger businesses will supply Square with greater payment volume from steadier streams of revenue. They also might provide a more fertile ground for some of Square’s add-on services like data analytics, payroll, and other software-powered sale solutions. However, larger businesses also have the ability to negotiate lower transaction fees with payment processing companies.
Square is not immune to this pricing pressure. For instance, when potential customers click on Square’s home page, they will immediately see the option to choose the size of their business. For those with sales under $250,000 per year, they are immediately shown the standard 2.75% per processed transaction fee. Customers with larger businesses, however, are asked to call for customized pricing options.
With these inherent headwinds, one would expect Square’s take rate to show signs of pressure but, thus far, it has resisted.
• A lot of discussion centered on Square Capital, Square’s business loan program to its clients. $318M loans facilitated in quarter, up 68% YOY, to ~49K vendors for average loan size of just over $6k. Maintaining 4% loan loss rate which is phenomenal for small business loans. When asked how Square was able to maintain that loss rate, CFO Sarah Friar credited the automation/machine learning Dorsey spoke of in his opening remarks:
So, Square was born using at the time what we called software algorithms and now we talk about machine learning and even deep learning.
We have clearly moved on that continuum and those models help us to really manage the risk prudently and the models get better and better as the cohorts mature and we get more and more data on that. So no change to the core business loan loss rates.
• Dorsey stated Square for Retail was an attempt to capture small business retail vertical. It’s a big opportunity: 450K SMBs in US alone, w/ $700B in annual sales. It also serves as a door for these businesses to Square’s larger ecosystem including Instant Deposit, Square Capital, CRM, etc.
• Sales and marketing expenses went up. CFO Friar said this was because Square has released number of products in past six months, products are now scalable, and company wanted to put “real oomph” behind products.
• Dorsey said company’s primary focus right now is on omnichannel commerce, so online sellers can sell offline and vice versa but only need one dashboard to access everything. Square for Retail was solution for this problem for retailers.
That’s about all I got right now. Questions/comments/concerns?
Thanks to Seeking Alpha for providing conference call transcript at https://seekingalpha.com/article/4094029-square-sq-q2-2017-r…
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