3 reasons why Square is just getting started

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Traders may be reluctant to think about Square (NYSE: SQ) as a “just beginning” business. Its market capitalization takes the company deep into large cap territory, and its valuation has made it much more expensive than fintech companies such as Pay Pal Where Visa. Nonetheless, three factors strongly indicate that Square’s growth story has just started in three critical ways.

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1. The square footprint

Square only provides its payment systems and services in a relatively limited area at this time. Other leading fintech stocks like PayPal and Visa serve more than 200 countries.

By comparison, Square is only active in Australia, Canada, Japan, UK, and US. This leaves large swathes of the developed world unserved by Square.

The most notable market where Square does not offer its services is the European Union. However, its purchase of Spain-based Verse in 2020, which continues to operate as an independent business for now, indicates that this may change soon. Entering countries that use the euro would instantly add 19 countries to its footprint, not counting the overseas territories and principalities that have adopted the currency. It also doesn’t include places like Switzerland, Singapore, or the huge markets it could potentially serve in the developing world.

Some critics may argue that its footprint makes it a developed-world company, unable to adapt to developing countries. Indeed, such challenges have spawned companies like Free Mercado‘s MercadoPago and StoneCo, who has come to face such challenges. However, Square has added functionality since its inception and may add functionality to cater to cash customers if it enters developing countries.

2. The square bank

Square had previously created Square Capital to provide business loans. Now Square can operate an industrial bank. Individual states (Utah in Square’s case) charter industrial banks, and they can take deposits from customers and provide consumer and small business loans.

Many might wonder what Square’s banking charter means for investors. So far, probably not much; the company said Square Bank would not have a significant impact on the 2021 numbers.

However, since she now operates a bank, Square stock could gain as the company begins to perform functions associated with traditional finance. The bank allows Square to make loans without involving a third party, for example. Such a decision promotes a competitive advantage by combining the bank with a fully developed fintech ecosystem (more on this in the next section). It can also help their Cash App, their peer-to-peer payment platform, in unexpected ways.

Square has recently faced complaints about the disappearance of money from Cash App. Security firms such as Chargeback Gurus point out that users cannot cancel Cash App transactions, and fraud rates increase three to four times when an individual money transfer does not require authentication or verification of his identity. Stories have also circulated in the media highlighting such fraud.

However, neither the states nor the federal government allow fintechs like they do banks. Square becoming a bank, it will be subject to more direct regulatory control. This could bring more direct oversight to Cash App at a time when it appears to need such rules.

3. The Square ecosystem

Square prides itself on creating “easy tools to empower and enrich people”. The company started out by providing the Square Reader, an add-on that made credit card transactions possible for consumers and single homeowners through a smartphone.

At first, this made Square comparable to the financial industry of the past, where different companies performed separate functions such as banking, brokerage, payroll, credit card transactions, and technology. However, over time it continued to add additional services through Square Payroll and Square Register.

Much of the added functionality also comes from Cash App. In addition to the basic fundraising and spending functions, Cash App also enables stock trading and purchase of Bitcoin.

The linking of these functions is increasingly making Square a one-stop-shop for finance. If consumers embrace Square, it would enable traditional verification, brokerage, and lending functions through its Bank and Cash app. For those starting a business, Square could provide loans as well as the necessary card readers, cash registers, financial software, and payroll needs.

This reduces the need for payroll companies such as ADP – and also for traditional banks. While Square would likely not “take over finance,” such a perception would likely bolster Square stock’s reputation.

The bottom line

Square supports a market cap of $ 95 billion. Also, a P / E ratio above 525 seems expensive compared to PayPal’s multiple of 65 and Visa’s P / E of around 45.

Still, Square will likely move to more countries and perform more traditional banking functions over time. Expansion into new markets and the nexus of traditional finance could make Square an all-in-one financial conglomerate. Given this potential, investors should consider getting into this fintech stock before the real expansion begins.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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