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Square: is it a viable business?

No, not yet, but this might be about to change.

Jack Dorsey recently made a photo post of an internal Square dashboard to celebrate their achievement of a Daily GPV (Gross Payment Value) of $2 million. A significant milestone as they are at the forefront of mobile payment and merchant card acceptance innovations.

This photo so intrigued me that I reached for my abacus and took a closer look at the dashboard figures....

-          Generated some additional Inputs,

-          Calculated annual cash flows, including some simplifications (e.g. Churn and a 1:1 ratio between users and devices/readers) and WAGs (Wildly Assumed Guesses), to derive;

-          Outputs with respect to Customer Life Time Value etc.

Great that Square are on target for their forecast GPV of $ 1 billion in 2011. By year end, Square will most likely have activated over 1.1 million readers and achieved annual GPV of $ 1.3 billion, yet the ARPU (Average Revenue Per User) will only be $ 34 unless something changes soon.

Looking deeper into the numbers 9,078 Daily Active Customers represents just 2.73% of all 332,483 activated readers. At first glance this suggests Square has some ground to cover between getting people registered for units and getting those that have Squares using them.  At present Square is not yet a viable business, but given that it's only a matter of months since this young company closed their $27.5 million funding round (announced Jan '11) you wouldn't expect them to have all the answers just yet.

The figures of 2.6 daily payments and an average transaction value of $ 84.66 show the promise of a "Pay-As-You-Go" card payment offering, because those that are using their Squares are making meaningful transactions.

Another point of interest is that the term Revenue is easily misunderstood given that approximately half to two thirds (WAG alert) of this will be a processing Cost To Serve (to Chase Paymentech and VISA/MasterCard/Amex etc.), meaning that the actual annual Gross Income per active reader is likely to only be $ 10. On Square's current model, the Customer Acquisition Cost (reader cost, shipment, customer registration and validation) is estimated to be $ 20, giving a disappointing customer payback of just over 2 years before overheads.

Furthermore, with a current Customer Life Time Value of only $ 11 the enterprise customer valuation would be around the $ 12.4 million mark. Which isn't a great return on investment for those who contributed to the most recent funding round, at a valuation estimate of $ 240 million.

Hence, my abacus based conclusion that Square hasn't found its business model......yet.

Founded in early 2009, Square is moving fast for an upstart in the stodgy bank led world of card payments. As you would expect from a company re-writing the rules, they are already addressing the challenges to their model and showing signs of continually re-positioning themselves;

1)      Messaging on the site has recently changed from cafe owners to mobile workers in order to focus on higher value segments of merchant businesses. Which I believe is targeting an increase in the Daily Active Percentage.

2)      Customer Acquisition Cost has been reduced by expanding into fixed distribution at Apple stores, thus removing the individual Pick/Pack/Ship component. Note that complete removal of this would decrease the customer payback to 1.3 years before overheads. But the real kicker here will be the KYC Credit Check costs, which similar high growth payment companies such as PayPal did not have to undertake when they started in the pre-SOX days. Further scale and innovation here is required to reduce customer acquisition costs.

3)      Improvements to the costs of account inactivity are also being targeted. At the Apple stores Squares are being sold for $ 9.95 each, with Square offering a $ 10 credit on activation. The company is limiting the $ 10 credit to one per customer irrespective of how many devices that customer registers. A simple but effective way of shifting some of the Customer Acquisition Costs back to the customer, and Square only paying for hardware that delivers economic benefit in the form of transactions.

The above innovations clearly show that there are some smart squares at Square working the numbers! Continued progress on these fronts gets the company closer to a viable business model. It is also a good indicator that the management know the business they are in, and are focusing on the parts that matter, although this is only my subjective opinion.

New/Additional Transactions are most probably the next logical place for innovation. With a 2.73% active customer rate the company needs more Squares being used for more payments. With the platform built, it is appropriate for Square to be seeking scale by attaching new Points of Payment that drive both customer sign-up, and active customer rates.

Luckily I don't have to wait too long to find out what Square will do next as they have a "major product announcement" on Monday 23rd May 2011. 

The grapevine is alive with comment about this announcement. Could it be that Apple will be using the Square platform to process customer card payments in their retail stores?

This would almost certainly deliver Square profitability in one move, yet I doubt such an announcement is "the" story. It is a little early for an upward march, and such a move is likely to be full of system integration issues.

There have been comments regarding the platform API that is under development, which in my opinion is likely to be akin to PayPal's X.com open developers' platform. If this is the announcement then Square are clearly saying "we'll get the customers but can someone else figure out how to get our customers using their Squares?".

Likewise, I would not expect an NFC related announcement, as this technology is still too complicated and early stage to affect the rates and ratios Square needs. If Monday's announcement is NFC related then please ignore all my previous comments regarding Square's management focus!

For now Square are grabbing new customers (currently 100,000 a month) so anything they announce will likely remain focused on accelerating this while retaining the proven simplicity of the Square proposition.

My speculation is that Square will announce product enhancements in the area of Personal Payments. Providing those with a Square even more reasons to use it and giving people more reasons to purchase one. Personal Payments would also neatly justify Visa's announced investment in the company.

Two things are for sure, Square's announcement on Monday will continue to disrupt the global consumer card payments market, and I'll be back with more of my thoughts next week......

 

28th May: Follow-up post is now available here.

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Comments: (2)

A Finextra member
A Finextra member 23 May, 2011, 09:01Be the first to give this comment the thumbs up 0 likes

'Square's announcement on Monday will continue to disrupt the global consumer card payments market'

Not unless it's a chip-and-PIN reader, it won't.

A Finextra member
A Finextra member 24 May, 2011, 08:39Be the first to give this comment the thumbs up 0 likes

Basically the announcement was a more complicated version of the Orange/Barclaycard Android phone/app.

James Campbell

James Campbell

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This post is from a series of posts in the group:

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.


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