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Merchant acquirer Square Inc. started out offering credit and debit card acceptance to tiny businesses and part-time sellers who wanted to accept plastic, but volume from Square’s biggest merchants grew 55% year-over-year in the third quarter and now accounts for 43% of Square’s gross volume.
Square, which refers to all of its merchants as sellers, considers a merchant large if it generates more than $125,000 in volume annually. Merchants generating $500,0000-plus in volume accounted for 14% of volume in the third quarter, up from 11% a year earlier and 8% two years ago, Square reported Tuesday. Those producing between $125,000 and $500,000 in charges brought in 28% of volume, up from 26% in 2015’s third quarter and 24% in the same 2014 period.
In contrast, merchants generating $125,000 or less in annual payments produced 57% of volume in the recently ended quarter versus 63% and 68% in the respective 2015 and 2014 quarters.
All of this means that Square, a high-profile upstart when it appeared on the merchant-acquiring scene in 2009 with a card-reading attachment for iPhones, is expanding beyond its very-small-merchant green fields into the more traditional but intensely competitive small-business payments market. Chief executive and co-founder Jack Dorsey, who also is chief executive of Twitter Inc., said on a conference call with analysts that some very small merchants that started out with Square stuck with the company as they grew.
And asked why Square’s per-transaction profit margin is holding fairly steady despite more volume from larger, supposedly more price-sensitive merchants, chief financial officer Sarah Friar said bigger merchants appreciate one-stop shopping. Square offers a menu of software, hardware, and various fee-based products such as merchant cash advances and instant funds deposits.
“First and foremost, merchants come to Square because they’re getting access to our end-to-end ecosystem, they’re coming for the technology, they don’t have to go piece it all together and take from a merchant acquirer and take from a point-of-sale system and take from a vendor selling them an acceptance device,” Friar said.
Square reported gross payment volume (GPV) of $13.2 billion in the third quarter, up 39% from $9.5 billion a year earlier. Transaction revenue as a percentage of GPV was 2.93% versus 2.95% in 2015’s third quarter, while transaction profit was 1.01%, down slightly from 1.04% a year earlier.
Beyond transaction-based metrics, Square reported that software and data-product revenues grew 140% year-over-year to $35 million. The Square Capital merchant-advance business and Caviar food-delivery service bring in most non-transaction revenues, Friar said. Square Capital has lent $1 billion since its 2014 start, and Friar said the instant-deposit service, which launched a year ago, has generated nearly 4 million deposits from 200,000 sellers.
Regarding EMV point-of-sale chip card transaction speeds in the U.S.—a controversial issue for many merchants, who have complained of slowness—Square said an update to its EMV and contactless card reader has reduced its average chip card transaction times by 25%, from 5.7 seconds to 4.2 seconds. Industry averages are 8 to 13 seconds, the company said, citing press reports.
Dorsey wants to cut times even more. “Our new goal now is 3 seconds,” he said. Dorsey didn’t explain exactly how or when Square would achieve that goal, though he said Square is a big promoter of swift near-field communication (NFC) contactless payments.
Square reported total third-quarter net revenues of $439 million, up 32% year-over-year from $332 million. Adjusted net revenues, which exclude revenues from Starbucks Corp. (the coffee retailer is moving off of Square’s system) and transaction costs, grew 51% to $178 million.
Despite reporting a net loss of $32 million for the quarter—slightly worse than the $27 million loss in the second quarter but well below the $54 million loss in 2015’s third quarter—Square increased its financial guidance for all of 2016.
