I see there’s been a lot of discussion around Square’s rollout of Square Installments and thought I would weigh in real quick. First, let me just say, that I have no idea if Square has been down the last week due to last week’s downgrade, Dorsey’s inside selling, the Square Installments launch, or just a broader market rotation where high-flyers such as Square are going to get hit first. But since Square Installments might be related and that seems to be the hot topic, I thought I could shed a little light on it.
First and foremost, to learn about the new service, check out this video: https://www.youtube.com/watch?v=HhCviU7_UCc
This isn’t about growing its business by capturing lucrative consumer loans, this is about offering a feature to capture more merchants in its ecosystem. For some merchants, this will be a very attractive service. Think of those that sell big-ticket items (art or custom carpentry) or offer big services (general contractors maybe). They now might use Square as their payments provider just because of this feature which allows the merchants to approach customers with additional payment options.
Second, I don’t think the proprietary data Square has and uses so effectively for Square Capital, will be available for these loans. I do not know if Square will have an inside advantage then over other lenders when it comes to better default rates. That’s okay. For the most part, third-party lenders will hold the loans and the risk. That SQ passes these off and miss out on returns from the loans is okay because, again, it’s all about capturing these businesses in their ecosystem. Not about juicing their profits from these loans.
Finally, this new product shouldn’t be a surprise to shareholders or analysts. Management has been talking about such a product since at least 2017’s Q3 conference call. In that call, CFO Sarah Friar said:
The secondary is consumer installment. So, recall we want to bring that superpower to small businesses that often big businesses have, which is the ability for them to finance a purchase for their customer, so it makes the customer’s purchase a little easier to decide upon. We think that ultimately grows their business. The net of it though is we see our broader ecosystem-so subscription services where Capital fits, still growing 84% year over year. In my mind, that speaks to just the broad ecosystem of many products. It’s not just Capital. Capital is very important. We’re going to keep growing it. But there are many more pieces that we’re now adding into that portfolio. All of which is helping our sellers do what they do best, which is getting out there and selling their products.
From https://www.fool.com/earnings/call-transcripts/2017/11/09/sq…
It’s not like Friar just dropped that comment and never brought the subject up again either. In the company’s most recent conference call, 2018 Q2, she again discussed it:
The secondary on Capital that we continue to iterate on is installments. Recall that is effectively where we place ourselves at that really interesting nexus between the buyer and the seller. We have oriented to be a seller product, so we know that small businesses traditionally don’t have access to installment programs. So, it’s a tool that larger businesses use to help them grow and we want to make sure it’s on offer to smaller businesses.
What we’re able to use there is the knowledge of both the business itself but also the consumer. So, we’re starting to learn about consumer information that we might see more broadly on Square’s network and from that, just continue to test and iterate. I think what we see so far gets us excited because the sellers who are utilizing Square installments are absolutely seeing their business grow. So most important thing, when they grow, because then we’ll grow.
From https://www.fool.com/earnings/call-transcripts/2018/08/01/sq…
What do these comments make clear? It’s all about the sellers growing their business! The consumer loan is just a means to do so.
I love the move and think the market is fundamentally misunderstanding the risk involved and why Square is doing it. That being said, while SQ is an awesome company, it is also highly-valued – as in nosebleed. When a company is valued like that, these types of things will knock it down. That’s okay. Hold for the long-term.
JMHO. YMMV.
Matt
Long SQ
Intuit (INTU), MasterCard (MA), PayPal (PYPL), and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx