Could Square emerge into a big bank disruptor?
The share price rally behind the payments business has pushed the business into the valuation levels of the big US banks so could Square be another significant challenger in financial services.
According to reports from Bloomberg, Square’s market cap is now around $US55 billion - just behind Goldman Sachs by $US20 billion.
Founded in 2009, the Jack Dorsey co- founded business initially provided payment acquiring services to retailers. The company then launched Cash App, a person-to-person payment network.
While the “jury is out” on such a bullish outlook, for Morningstar senior equity analyst Brett Horn, it is the Cash App offering that has done well for the business.
Growth momentum for the Cash App was solid – with revenue for this part of the business up 197 per cent year-over-year in the first quarter of 2020.
Management noted that this area also saw a strong increase in April.
In comparison, the “legacy side of the business,” faces economic challenges around the health pandemic, according to Horn.
Gross payment volume fell 39 per cent year-over-year in April – and the Morningstar analyst notes that it was a steeper decline than he has seen for electronic payments.
“This suggests Square’s merchants may be suffering disproportionately. We remain concerned that the company’s micro merchants could fail in large numbers because of the coronavirus and any lingering macroeconomic weakness.”
However, he believes that the online nature of P2P should help to insulate this business in the near term and provide a ballast for the overall business.”
In terms of challenging the US banks Horn does not see the business as a major disruptor in broader financial services.
But at the margins, he sees Square meeting the needs of a large unbanked population in the US.
“But I don’t see a wholesale defection of consumers from banks to its Cash App. I think that's a stretch.”
Square also has businesses in Canada, Japan, UK and Australia with 5 per cent generated from outside the US.
For Horn, there is ample opportunity for Square to ramp up in electronic payments.
“The growth in electronic payments is going to increasingly come from less developed markets. There is a huge opportunity there. With only 5 per cent revenue coming from offshore, frankly, I feel the firm has not done enough to exploit that opportunity.”