Square’s success in fintech – what can we learn from it?
SQUARE INC., the financial services startup by Twitter founder Jack Dorsey, has been having a banner year.
The firm’s stock price has tripled since its IPO in 2015 and it is expanding its portfolio of offerings beyond mobile payments options.
In an exclusive interview with Bloomberg, Dorsey said his business’ main competition was neither banks nor traditional financial institutions, but rather other fintechs looking to offer services to the unbanked populations.
“We’re not really competing with financial institutions and banks and traditional lenders. Our average loan size is US$6,000, so we’re competing with people going to their friends and family and asking for a loan,” Dorsey said told Bloomberg.
He singled out small-loan borrowers as the target market that has traditionally found it difficult to obtain capital from banks.
When Square first came into being, it aimed to provide cheap point-of-sale (POS) options to merchants through their signature white credit card readers, which can be connected to tablets and mobile devices.
Today, Square’s lending business is contributing to a larger portion of their revenues; according to Dorsey, the segment grew 68 percent this year and onboarded a host of new investors including Canada’s’ national Pension Plan Investment Board. Their customers include small businesses and restaurants seeking capital to purchase stock, cover the costs of opening outlets and daily operations.
Square’s strategy has led them to facilitating more than 49,000 business loans, totalling US$318 million in this year’s second quarter alone.
The company’s performance this year has leaped ahead of analysts’ estimates and provides some answers on the future of fintech in today’s market.
Once hailed as massive disruptors in the financial services space, fintechs as significant as Transferwise have kind of fallen away in tandem with investor spending, reflecting the hype that has bloated estimations on their impact.
Markus Gnirck, co-founder and a partner at private equity firm Tryb Capital, told Tech Wire Asia at a previous interview fintechs went after customer-focused segments when they first emerged. The startups have worked to unbundle services, but he said it’s time to rebundle products so the software can grow further.
— RaviRaj Langhnoja (@raviraj_bdc) August 3, 2017
“Fintech has been unbundling the banks, and it’s time to consolidate,” he said. “The question is how do you rebundle across new product lines?”
In contrast, Square’s focus on SME businesses and the company’s success in the space offers us an object lesson that all fintech companies should pay attention to if they want to survive beyond the hype. Monetizing their services and finding ways to stay soluble is a significant challenge for all startups and fintech companies are no different.
Gnirck said fintechs need to market their products more reasonably, while finding key clients that will support them. For example, Square’s niche is the merchants and small loan borrowers who buoy their profit margins.
However, Square is also making an effort to go after the business-to-customer (B2C) segment by bringing banking services to them. Likely, the impact will be deeply felt in Southeast Asia and South Asia, where a majority of the population don’t have access to financial facilities. Square Cash, an app that allows users to store money and access peer-to-peer payments without having to connect a bank account, could potentially be a game changer for Southeast Asia in particular.
Gnirck points to the region’s highly mobile and connected populations. Customers here have cash and smartphones, but not bank accounts, making this particular segment a potential gold mine for Square. Gnirck said the missing link in solving Southeast Asia’s unbanked population problem was the absence of banks providing dynamic solutions.
“My impression is that these people are all online, they all use e-commerce,” he explained. “It’s not about getting people on board, it’s about getting banks in on it. I have a feeling banks have completely missed out and been left aside.”