Global payments platform provider Square Inc is now the fastest growing merchant services company in Australia and one of only a handful turning a profit.
Financial accounts lodged with ASIC show that the group’s local subsidiary – Square AU Pty Ltd – doubled revenue in the 12 months to the end of December 2019 to A$82 million after thousands of small retailers joined its merchant base.
The revenue surge was mostly attributable to soaring transaction volumes before the global COVID-19 pandemic crunched retail activity early last year.
The financial accounts appear to indicate that Square was entering an earnings sweet-spot in Australia before the pandemic paralysed key merchant payments sectors such as hospitality.
Square posted a net profit of $8.1 million in 2019 – a 47 per cent improvement on its 2018 bottom line of $5.5 million.
The operating performance was actually much stronger given that the company paid senior managers an extra $3 million in share-based compensation during the year.
In the absence of those payments the bottom line would have doubled.
While Square Australia refused to comment on the composition of the latest financial accounts filed with the corporate regulator, a spokesperson said the company had continued to grow merchant subscriptions throughout 2020.
Since entering the local merchant services market six years ago mystery has surrounded the financial performance of Square’s local operation, with some payments experts suggesting that its business model would take at least a decade to generate positive returns.
News of Square’s earnings momentum also makes a mockery of public comments by several Australian bank executives when the company flagged its Australian launch seven years ago.
“There is an increasing preference in Australia to use chips in the cards rather than magnetic stripes and I don’t think Square can handle that at the minute," a National Australia Bank payments executive told the AFR in February 2014.
Square’s profitability now separates it from rivals such as Tyro and Smartpay NZ that are both generating losses as specialist providers of merchant services to SMEs.
Tyro, which generates $200 million a year from merchant fees and terminal rental income, appears particularly vulnerable to Square’s pitch to small business customers.
Since 2017, Tyro has been growing its annual revenue line at 30 per cent a year, which is significantly slower than its Californian-based rival’s blistering growth rate.
Payments expert Grant Halverson believes Tyro’s expansion might also be impeded by reputational fallout from a protracted outage in January that froze thousands of merchant terminals.
“Tyro’s outage could not have come at a worse time,” said Halverson.
“The reputational damage might take several years to recover from while Square continues to grow very strongly in its niche.”
A key to Square’s success is a simple pricing structure where merchants are able to pay only a flat fee for transactions processed through its platform.
The merchant offer is exclusively driven by mobile point of sale technology that is cheaper to run than fixed line systems.
Square’s target market in Australia appears to be evolving, with the company now marketing its merchant payments offer to chain retailers and medium-size businesses operating multiple sales locations.
“We've also seen a higher share of up-market businesses turn to Square as we continue to bring out more sophisticated business tools, like Square Register,” the Square spokesperson said.
“In fact we've seen phenomenal growth in our retail base alone, with the number of larger multi-location (two or more) retailers increasing 122 per cent annually.”
The widening of Square’s target market could hasten rollouts by the four major banks – NAB, ANZ, Westpac and CBA - of software-driven merchant payments platforms to defend their merchant bases.
Nascent technologies such as Quest’s Airpay Tap system are expected to lower the cost of merchant plans offered by the major banks because they allow retailers to accept card payments through an app loaded onto a mobile phone.
Banks should be able to slash the pricing of merchant plans because they will be spared the upfront capital expense of having to purchase terminals.
Recent moves by banks such as ANZ and Bendigo to outsource their merchant acquiring operations also reflect strategic challenges posed by Square and others in the fragmenting payments processing market.
The 2020 financial results of Square’s local arm are expected to be released in July.