Square Inc has been a source of debate in our industry for years. When Square made its debut five years ago and consumers responded positively, other payment players scrambled to formulate their mobile payments strategies. Giants like Verifone tried to closely emulate Square’s business model and found that it just wasn’t profitable. Is Square making any money with their mobile payments service? The Wall Street journal offered some insight on just that in a report last week.
The Wall Street Journal reported that Square has been in acquisition talks with the likes of Google, eBay and Apple. While the acquisition rumors are being denied by official spokesmen, no one is denying Square’s shaky financial position.
Since 2009, Square has raised $340 million in equity financing. The Wall Street Journal reports that they’ve burned through just over half of it, and their source also pegged Square’s 2013 losses at about $100 million. With losses like that and the investment money starting to run low, it’s clear that Square–or any company that buys Square–is going to need to make a change to keep the business above water.
Change could come in a few different forms. Square could try to cut costs, but in this business that’s extremely difficult. Every credit card company, large or small, has to pay the same interchange rates and fees to Visa, MasterCard, Discover and American Express. Those rates are public knowledge and they level the industry playing field. The Wall Street Journal reports that a full 80% of Square’s costs are inflexible fees from the card brands. That leaves very little cost that can be trimmed, certainly not enough to bring Square into the black.
I see two other options. The first is raising prices on their current offerings. Higher prices could lead to profitability, but it would also lead to some merchants moving from Square to other providers. The second option is to bring new, higher-margin products to market. This is their best bet, but at the time of writing the prospects aren’t looking good. Square has been experimenting with a few new services, but none of them are high earners and some of them bring no revenue at all.
It’s hard to say what Square’s plan is for the future, but one thing is clear: their current business model is not sustainable. Big changes are coming to Square.