Credit: Source: SquareFeatures include employee management, payroll distribution, calendar scheduling, third-party app integration, and business analytics. Its unique insight into millions of businesses of varying sizes enabled Square to launch Square Capital in mid-2014, which provides working capital advances to qualifying merchants. Square has signaled it is particularly bullish on the lending segment of its business.
In its most recent earnings report, Square reported that Square Capital extended over $400 million in more than 70,000 cash advances to its merchant customers in 2015, and, in a sign of the segment's popularity, over 90% of customers accepted offers for a second advance. However, Square doesn't keep the loans made from Square Capital on its balance sheet. Rather, it simply collects a fee for its part in helping facilitate the merchant advances, making this portion of its business a particularly high-margin segment, which bodes well for the company's continued push toward profitability. For context, Square's core payments processing business typically produces gross margins around 35%, whereas its software segment, which includes Square Capital, enjoys gross margins of roughly 60%.
The company faces competition from a host of players focused on facilitating credit to small and medium-sized businesses, including PayPal , LendingTree , and more. Here, Square remains well behind the likes of PayPal, though the aforementioned growth in Square Capital should certainly prove encouraging.
Growing player in a massive market
To say the least, Square's business model puts it in the center of a market whose size is measured in the trillions, not billions. According to Square's S-1 filing, card payments in the U.S. alone are expected to increase from a 2013 transaction volume of $4.9 trillion to $7.6 trillion by 2018. Globally, card transaction volume is expected to go from $16 trillion to a whopping $43 trillion by 2023.
However, given the expansive nature of its market opportunity, it should come as no surprise that Square faces competition from a number of well-positioned firms, including PayPal, as well as a hoard of smaller private firms. Additionally, Square's recent move into online payments pits the firm against the likes of Apple Pay, Alphabet 's Google Wallet, Amazon.com , and many others. This move alone helps expose Square to a segment of the payments market that is expected to grow at an annual rate of 9.4% in the U.S. through 2018 according to research from McKinsey & Co.
All told, Square remains a relatively minor, but growing, presence in the fragmented, multi-layered global payments market. Continuing the focus on building tools and services that cater to small businesses should help the company continue to grow its market share in this traditionally overlooked portion of the payments procession space. Make sure to check back to fool.com in the coming days for more coverage on Square's valuation at its current levels.
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The article Understanding Square's Business Model originally appeared on Fool.com.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andrew Tonner owns shares of AAPL. The Motley Fool owns shares of and recommends GOOG, GOOGL, AMZN, AAPL, and PYPL. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
